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Published 6:59 PM EDT Apr 21, 2015
The United Kingdom-based trader accused Tuesday by the government as a contributor to the May 2010 'Flash Crash' on Wall Street engaged in a trading practice known as 'spoofing,' a scheme in which bogus trades are placed but never executed in a ruse designed to both trick other traders and manipulate the market in a quest for illegal and ill-gotten gains.
The U.S. Justice Department alleges that Navinder Singh Sarao, 37, from Hounslow, U.K., who was arrested in his home country Tuesday, used this market manipulation strategy on 'numerous occasions' from roughly April 2010 to April 2014 – including May 6, 2010, the day of the so-called Flash Crash when the Dow Jones industrial average plunged more than 600 points in a matter of minutes before recovering.
The Commodity Futures Trading Commission gained authority to crack down on spoofing under the Dodd-Frank financial regulation act of 2010 and adopted enforcement regulations in 2013.
It brought its first case involving spoofing the same year. Panther Energy Trading in Red Bank, N.J. and its principal Michael Coscia were ordered to pay $2.8 million and banned from trading for one year.
Here's a quick synopsis of how Sarao allegedly used the 'spoofing' technique to manipulate the intra-day price for E-Mini S&P 500 futures contracts trading at the Chicago Mercantile Exchange (CME) to net illegal gains of roughly $40 million and nearly bring the U.S. stock market to its knees. E-Minis are stock market index futures contracts based on the benchmark Standard & Poor's 500-stock index, and are considered the most popular and liquid index futures in the world.
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Sarao, a futures trader that operated out of his U.K. home, executed his alleged plot using a 'commercially available automated trading software,' which he 'customized' to better execute his market 'spoofing.'
In an attempt to manipulate the market, the government alleges that Sarao placed a large number of sizable sell orders 'at different price points' to make it look like there was a big seller in the market and lots of stock for sale as a way to drive down prices, only to then 'modify and ultimately cancel the orders before they were executed.' The ruse netted Sarao big profits.
Published 6:59 PM EDT Apr 21, 2015
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