British speed trader Navinder Singh Sarao arrested over alleged role in May 2010 US 'flash crash'
A high-frequency trader has been arrested in Britain amid allegations he manipulated the futures market and played a role in sparking the May 2010 "flash crash", the US Justice Department said.
Navinder Singh Sarao, 36, of Hounslow, London, was criminally charged on charges of wire fraud, commodities fraud and manipulation, said the DoJ.
The Commodity Futures Trading Commission (CFTC) also filed parallel civil charges against Sarao , calling him a "very significant player in the market."
It is the first time US regulators have alleged that market manipulation played a role in the flash crash, in which the benchmark Dow Jones Industrial Average plunged more than 1,000 points before recovering somewhat towards the end of the day's trading.
What is High-Frequency Trading (HFT)?
It is a primary form of algorithmic trading in finance where traders use sophisticated technological tools and computer algorithms to rapidly trade securities.
High-frequency traders move in and out of short-term positions at high volumes aiming to capture sometimes a fraction of a cent in profit on every trade.
HFT accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.
Flash trading is a form of trading in which certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee.
Sarao is said to have profited about $40m (£28m) through his company Nav Sarao Futures Limited Plc , the CFTC said. The regulator added that his alleged manipulation stretched over the period from 2010 to 2014 and continued until recently.
"His conduct was at least significantly responsible for the order imbalance that in turn was one of the conditions that led to the flash crash," CFTC head of enforcement Aitan Goelman told a conference call with journalists.
The Justice Department said it plans to request that he be extradited to the US
The DOJ said Tuesday that Sarao used an automated trading programme to execute his scheme, which the department described as "dynamic layering".
That strategy involved placing multiple, simultaneous large volume sell orders at different price points to create the appearance of substantial supply.
He then allegedly modified the orders at a fast pace to keep them close to the market price, and cancelled them without executing them. And when prices fell, he allegedly would sell futures contracts and buy them back at the lower price.
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