If you think investors’ shattered confidence in the markets is about a single trader who may have ignited the 2010 “flash crash” by “spoofing,” you may be Wall Street’s perfect customer.
And no, that’s not something to be proud of.
Because the problem with the markets isn’t about the alleged actions of a single trader. It’s about the system that allowed Navinder Sarao the ability and access to carry out his alleged scam and create potentially huge losses for others. It’s about a regulatory system so meek, overmatched and sluggish it took five years to find its main suspect.
And, if you’re like me, you have serious doubts about whether we will ever know if this guy is truly guilty of anything.
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It’s not that the complaint against Sarao isn’t damning. It lays out how Sarao allegedly used futures orders and E-minis to create the appearance of supply or demand, in turn manipulating the price of the securities and then making smaller trades that netted him $879,000 on the day of the flash crash and roughly $40 million during a four-year span.
In itself, a bad buy who does bad things shouldn’t surprise anyone. There have always been unscrupulous actors in every market, every business, every realm of life. Trees grow bad apples. What’s truly troubling is that Sarao, if he is to blame, was able to continue this practiced unabated. There have been roughly 1,000 trading days since the May 6, 2010, flash crash. Sarao used a layering technique to manipulate the market on at least 366 of those days, according to the charges filed by prosecutors.
Where, during this time, was the Chicago Mercantile Exchange CME, -0.47% , where much of the alleged activity took place? Where was the Securities and Exchange Commission and the Commodity Futures Trading Commission (which eventually brought charges)? Where was the industry itself? Does anyone on Wall Street even care?
Prosecutors say the CME sent Sarao “correspondence” on the day of the flash crash.
Here is the message: “All orders entered on Globex during the pre-opening are expected to be entered in good faith for the purpose of executing bona fide transactions.”
And here’s what Sarao, according to a vendor working with him, said he told the CME: “kiss my ass.”
The CME did not immediately respond to a request for comment.
Amazingly, this back and forth went on for years between Sarao, the CME and regulators. Exchanges and intermediaries would ask him to stop “spoofing,” or making phony orders, and Sarao would make excuses, such as everyone’s doing it or it isn’t me. I’m paraphrasing here, but not much.
That Sarao could basically fend off regulators for perhaps more than 1,000 trading days by simply denying, being belligerent and ignoring requests to stop is more outrageous than simply a trader trying to game the system.
Industry leaders complain about onerous regulation that’s come down from Washington and warn that they won’t be able to help the markets in another panic. And yet they are strangely silent when the alleged perpetrator of the most disruptive market event of the last decade or more is allowed to manipulate markets for five years.
Poll after poll shows market trust in the dumps. Last summer, Better Markets found that 64% of voters don’t trust the markets and 60% support more regulation. A poll by CNBC in March 2014 found 75% of respondents felt the market was “rigged.”
Is it any wonder people don’t trust the markets? Front-running and high-frequency trading became front-page news with the publication of Michael Lewis’s “Flash Boys” last year and the most significant response has been an SEC proposal to register high-frequency trading firms. Trust me, when I say this is a lightning-fast response by the commission.
It’s that foot-dragging, weak-willed response to wrongdoing that’s the problem. After all, Sarao is no different than the manipulations of “John Doe”, the mutual fund late-traders of a decade ago, the specialist “interpositioning” before that and theCoal Hole shenanigans of the 19th century.
Bad actors are everywhere. It’s the lack of good guys that are the problem.