So now we know -- the origin of the 2010 "Flash Crash" in the world's largest market was ..... Hounslow

Thursday 23rd April 2015

So now we know  --  the origin of the 2010 "Flash Crash" in the world's largest market was ..... Hounslow

 

"Flash Crash charges spark alarm over weakness in US markets", All papers inc. The Financial Times, p.1, 10, 11, 15, & 17.

 On May 6th 2010, the Dow Jones index fell almost 1,000 points in a matter of minutes before recovering its losses almost as quickly. Market giants such as General Electric and Accenture briefly traded at one cent per share. The cause of this unprecedented rollercoaster ? Well, according to the US authorities who show little embarrassment at previously blaming a large sell-order from a Kansas mutual fund, we can put it down to a single futures day-trader operating out of his parents' modest semi-detached under the Heathrow flight path.

The US is seeking the extradition of Navinder Singh Sarao to face charges of wire fraud, commodities fraud, commodities manipulation, and "spoofing", the practise of placing large orders visible on a computer trading platform only to cancel them before execution. In particular, Mr Sarao is alleged to have placed sell orders totalling 75,000 E-mini S&P futures contracts on the Chicago Mercantile Exchange (CME)  --  the implication being that the unfilled orders were placed specifically to attract more selling and scare away buyers.

Let's not speculate of Mr Sarao's guilt or innocence in the course of events on that day. He certainly seems guilty of "iffy" behaviour over a period of time, but seeking to jail him for 380 years may prove a stretch (excuse the pun). His trading system, as with so many others driven by computer algorithms, was switched off some minutes before the crash began. But there are wider issues to address here.

There are no doubt a good many of these sole-traders operating in similar fashion, so why have the US authorities failed to bring any others to book? The avalanche of regulation brought in since the banking crisis has unsurprisingly been targeted at banks,"shadow" banks and large asset managers.... perhaps it's time for some focus on individuals. And the anachronism of stock markets and stock index futures markets being regulated by different bodies (the SEC and the CFTC respectively) now looks downright dangerous.

But the most worrying aspect of all, and one for which it is hard to see a solution, is the nature of fast-paced, computer-algorithm driven trading systems. Very often, these systems point the same way, and tend to switch off when something out of the ordinary occurs. The resulting lack of liquidity means that there is nothing to absorb what in other circumstances should have been a small market move. The authorities, and not just in the US, may yearn for simpler times and more "old-fashioned" trading methods, but can't turn the clock back. Theoretically, there's no reason why a flash crash shouldn't happen again at any time. Now there's a thought.