The US stock market regulators’ finding that a small time trader based in Britain has triggered the trillion dollar flash crash of May 6th 2010 has created many questions.
Navinder Singh Sarao, a first generation Indian origin investor who operated from his parent’s home in West London is at the centre stage of the new theory put forward by US Commodity Futures Trading Commission.
Mr Singh, 36, who is reported to have made just 40 million in four years from trading; has placed nearly $ 200 million dollar order on that day in US stocks. Within quick time, he has withdrawn his trade orders before attracting large number of high frequency traders into the market. This illegal activity of making trade order aimed at cancelling it later is known as spoofing.
Amidst high volatility, the market has fallen by nearly 10 percent, producing one of the largest intraday stock market crashes in US history. The May 6th crash lasted for around 36 minutes and recovered later, creating the phenomenon known as flash crash.
The US authorities have taken nearly five years to identify Mr Sarao as the culprit who initiated the crash. But, many experts question how the small time trader with insignificant trade volume has to be responsible for the crash which may put him in jail for nearly 25 years. There are many other high frequency traders who participated and contributed to the crash.
Mr Sarao was described by his fellow traders as a genius though having strange character. Living in Britain he mastered the art of intelligently trading in US stocks. Interesting fact about Mr Sarao is that he is so small compared to the usual big ticket high frequency traders who makes quick trading to reap profit.
But on the other side of the issue, the US stock market regulators will are struggling to correctly measure the small time trader’s role. There are usually many big investors who are not trapped by the authorities. Similarly, one man with almost too simple trades creating the trillion dollar crash indicates the vulnerability of the stock market trading even in big economies like the US. This will raise issues about the credibility and quality of financial market regulation as well.
