Navinder Singh Sarao, a U.K. flash trader that nearly crashed the U.S. stock market nearly five years ago, was arrested and is now charged with stock market manipulation, and multiple counts of fraud including wire and commodities fraud.
In May 2010, the stock market nearly crashed when the Dow Jones plummeted 1,000 points in only five minutes resulting in about $1 trillion worth of loses in market value. Navinder Singh Sarao allegedly manipulated the stock market to create the impression that people were naturally selling their contracts just to buy those contracts when their value severely dropped and resell them later, when the market recovered.
The scheme brought more than $40,000,000 profit into the trader’s accounts. According to investigators, the man used specialized computer programmes to generate false trades on the Chicago Mercantile Exchange from the comfort of his living room in Hounslow, west London.
US investigators deem Mr. Sarao the main person responsible for the Flash Crash of the stock market on May 6, 2010 which stripped the Dow Jones Industrial Average off of hundreds of billions of dollars in value in less than 5 minutes.
The US Commodity Futures Trading Commission (CFTC) and the Justice Department have both charged the man with financial market manipulation that led to $40 million personal gains over the course of five years.
Mr Sarao, who ran a one-man private business from his parents’ home in Hounslow, was arrested Tuesday by the British police after several requests from American authorities.
He now risks extradition to the U.S. where he will face a trial on the criminal and civil charges filed against him on fraudulent market manipulation counts.
His neighbors said that he was a very quiet man, married with two children, who lived in a house next to his parents’ home where his trading company was registered.
One of the neighbors said that the Saraos were a quiet and polite family whose members said hello and goodbye every time they crossed a neighbor. Mr. Sarao’s parents both work while he lives with his wife and daughters next to their house, the neighbor also said.
“No-one has ever suggested they are wealthy,”
Aitan Goelman chief investigator at the CFTC recently reported that Mr. Sarao was an “extremely active” trader both ahead and during the flash crash. The CTFC investigator also argued that the trader’s misconduct significantly contributed to the order imbalance which triggered the crash. He also described the flash trader as the significant factor that caused the stock market’s crash that day.
After publishing its civil complain against Mr. Sarao, the CFTC vowed to protect the stability of U.S. futures markets and seek and prosecute all manipulators of U.S. markets no matter where they lived.
On May 6, 2010, the Dow Jones Industrial Average index collapsed 998.5 points generating panic among participants for at least 45 minutes. At the end of the day it was still down by 348 points. Nearly all major stock exchanges of the world had to deal with the resulting ripple effects.
Mr. Sarao’s case confirms previous concerns on the dangers of high-frequency-trading, which was blamed for the extreme volatility of stock markets since the financial crisis’ debut.
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