During the Wall Street flash crash of 6 May 2010, the Dow Jones index lost 700 points in a matter of minutes, before recovering just as quickly. US authorities, which claims Sarao made $40m in profits from 2010 to 2014, are seeking to extradite him to stand trial in Illinois.
The Commodity Futures Trading Commission (CFTC) suggested that Sarao was first contacted in 2009 by regulators who questioned his trading activity. Upon finding that these activities didn’t stop, the US Department of Justice has charged him with wire fraud, commodities fraud and market manipulation.
The Justice Department said: “By allegedly placing multiple, simultaneous, large-volume sell orders at different price points – a technique known as ‘layering’ – Sarao created the appearance of substantial supply in the market.”
Separately, the CFTC released details of civil charges against Sarao and his company Nav Sarao Futures.
Sarao was arrested a day after Paul Volcker, former chair of the Federal Reserve, revived a call for the CFTC to be merged with the Securities and Exchange Commission (SEC). He warned that the US’s regulatory system has left some systemic risks unchecked.
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He was granted bail, which has been set at £5.05m in a London court. A review hearing has been set for 26 May.
But the failure to find Sarao’s alleged misconduct was “a negative for the CFTC’s investigation at the time”, said Robert Engle, finance professor at NYU Stern School of Business. “They were looking for this sort of activity, but they didn’t find it.”
The case was brought up due to an anonymous tipster under a federal whistleblower award program.
Sherrod Brown, a Democrat on the Senate banking committee, said: “It’s encouraging that the Justice Department and [CFTC] are pursuing this case, but troubling that it has only come to light now with the help of a whistleblower who invested substantial time in putting the pieces together.”
The case marks the first time US authorities have alleged that illegal activities played a role in the crash. According to Engle, it changes the findings and hostory of the flash crash.
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