U.S. authorities have charged a British futures trader with making about $40 million in illicit profits and contributing to the May 2010 “flash crash” by manipulating the market for futures contracts based on the S&P 500.
Navinder Singh Sarao, 36, was arrested Tuesday in the United Kingdom on criminal charges brought by the Department of Justice alleging wire fraud and commodities fraud related to the May 6, 2010, flash crash, when the Dow Jones Industrial Average plunged 600 points in five minutes.
Also on Tuesday, the U.S. Commodity Futures Trading Commission announced it had filed a parallel civil enforcement action that alleges Singh and his Nav Sarao Futures Limited PLC engaged in a “massive effort” to manipulate the price of E-mini S&P 500 futures contracts from April 2010 to the present.
“Protecting the integrity and stability of the U.S. futures markets is critical to ensuring a properly functioning financial system,” CFTC Director of Enforcement Aitan Goelman said in a news release. “Today’s actions make clear that the CFTC, working with its partners on the criminal side, will find and prosecute manipulators of U.S. futures markets wherever they may be.”
According to the CFTC, Sarao manipulated the E-mini market by “spoofing,” a strategy that involved placing, modifying, and canceling hundreds of thousands of orders “with no intention of executing such orders” on at least 12 trading days including May 6, 2010.
When orders are “spoofed,” other trading participants may be tricked into believing there is either increased supply or demand for a security, causing artificial price swings from which the spoofer can profit.
On each of the 12 days, the CFTC said, Sarao traded on average $7.8 billion in notional value, resulting in daily profits averaging approximately $530,000. Total profits on those days alone amounted to about $6.4 million, according to the commission.
The CFTC alleged that Sarao contributed to the flash crash by “applying close to $200 million worth of persistent downward pressure on the E-mini S&P price.” The sharp drop in the E-mini price that day was followed by similar plunges in the prices of other major U.S. stock indices and individual stocks.
The Department of Justice has requested Sarao’s extradition from the United Kingdom.