Tuesday 21 April 2015 2:37 pm

British trader Navinder Singh Sarao arrested and charged over 2010 "flash crash"

A British trader has been arrested for his alleged role in causing the May 2010 "flash crash" which wiped billions off the value of US stocks and caused indexes to plunge.

Navinder Singh Sarao has been charged by the US Commodity Futures Trading Commission (CFTC) with manipulating the markets and making $40m (26.7m) in the process.

The US is seeking extradition for 37-year-old Sarao after he was arrested by the Metropolitan Police working with the Financial Conduct Authority (FCA) at his Hounslow home in west London on Tuesday.

On top of the civil charge brought against Sarao by the CFTC, the Department of Justice has delivered a criminal complaint against the trader.

The "flash crash" of May 6 2010 caused the Dow Jones Industrial Average to plummet by almost 1,000 points in an hour before ending the day 348 points down – the largest one-day decline in the index's history.

The CFTC allege that Sarao's financial trading company Nav Sarao Futures used a trading platform to manipulate the E-Mini S&P 500 futures contract by through an automated "layering" of large sell orders which applied $200m of downward pressure on its price. It thanked the FBI, Scotland Yard and the FCA in assisting with the investigation.

Sarao has been charged with one count of wire fraud, ten counts of commodities fraud, 10 counts of commodities manipulation.

Below is how the CFTC detailed Sarao's alleged manipulation of markets:

…according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&P central limit order book (the Layering Algorithm), with each sell order one price level from the other.  As the E-mini S&P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price.  Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions.  According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days. 
The Complaint alleges that Defendants often cycled the Layering Algorithm on and off several times during a typical trading day to create large imbalances in the E-mini S&P visible order book to affect the prevailing E-mini S&P price.  Defendants then allegedly traded in a manner designed to profit from this temporary artificial volatility.  According to the Complaint, from April 2010 to present, Defendants have profited over $40 million, in total, from E-mini S&P trading.