Flash Crash Extradition: Why I am Sceptical Sarao is Responsible

Navinder Singh Sarao is wanted for extradition to the United States on allegations that he momentarily crashed US financial markets on 6th May 2010.

We know that the flash crash was provoked by a large fundamental trader who initiated a large sell order of E-Mini futures contracts in order to hedge an existing long equity position.

This resulted in a large price pressure that was amplified by high frequency trading, which also transmitted this effect to other equity products.

The HFT computers would pick this trend up by managing their inventories, which led to the exacerbation of the negative price impact and increase in volatility.

When the market is stressed HFT computers have shown to amplify the price move and spread it across many markets and as volatility increases so does the speed at which the HFT traders work.

But the HFT traders themselves are not necessarily the cause of the crash per se.

I am sceptical one person would be able to cause the flash crash.

It was a very big price movement initiated by a large sell order, but the market bounced back fairly quickly.

And that is why I doubt if it had severe consequences for market efficiency overall.

Spoofing and layering activity that the trader has been charged with is illegal. However, it is quite difficult to prove.

In order to do so the authorities would have to monitor the trader over a long time to provide credible evidence of the law breach.

Perhaps he was engaged in this sort of activity during the episode of the flash crash, as he probably had done so over a longer period prior to it.

However, it would be very hard for one person to cause the flash crash to such an extent, especially in such a liquid market as the E-mini futures market.

 

 

Theme: GKNEWS