The circumstances surrounding the arrest of Navinder Sarao for his actions related to the Flash Crash have been covered widely, but there is one angle that seems to be slipping through the cracks: Sarao’s intent. Or more precisely, his lack of intent.
Considering the volume of trade orders Sarao is alleged to have placed and then canceled, it seems likely his intention was to manipulate the market. And if Sarao ever stands trial and it is proven that he was “spoofing” or manipulating the market in some other way, then he should be punished accordingly.
However, I find it hard to believe Sarao woke up on the morning of May 6, 2010, and said to himself, “Today I am going to crash the market, drive shares of Accenture to one cent, raise Apple shares to more than $100,000 and then call it a day.” In fact, his actions after the Flash Crash suggest he had no idea his trades played such an allegedly large role in the day’s events. After all, its not like he cashed in his ill-gotten gains and high-tailed it to some non-extradition country (or the Moscow airport). He kept doing exactly what he was doing.
The notion that one trader, reportedly using commercially available trading tools, could cause so much damage makes all the latest efforts at enhancing market structure and cybersecurity seem trivial. On Monday — just hours before authorities moved on Mr. Sarao — I wrote the following about the new “cyber arms race” over on the Bloomberg Vault blog:
“The goal of adopting an arms race approach to cyber security is simple: Make successful attacks so expensive and sophisticated to launch that the pool of possible bad actors is relatively shallow. … Defenses have advanced to the point where the stereotypical vision of a lone 16-year-old wreaking havoc from his parents’ basement has become far less of a reality.”
Now I don’t know if Sarao was trading from his parents’ basement or an upstairs bedroom, but the end result was a market disruption that was tantamount to a hacker’s dream. Except Sarao wasn’t trying to “hack” anything.
The truly frightening part of this whole case is that if one trader like Sarao could wreak so much havoc unintentionally, imagine what a group of traders could do if they actually intended to bring down the markets.