<p><strong>What exactly is it that the trader is alleged to have done, how did this allow him to make irregular profits, and what is the mechanism by which he was able to single-handedly move the entire equities index?</strong></p>

<blockquote>
  <p>According to the Complaint, for over five years and continuing as recently as at least April 6, 2015, Defendants have engaged in a massive effort to manipulate the price of the E-mini S&amp;P by utilizing a variety of exceptionally large, aggressive, and persistent spoofing tactics.  In particular, according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&amp;P central limit order book (the Layering Algorithm), with each sell order one price level from the other.  As the E-mini S&amp;P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price.<br>
  Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions.  According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days.<br>
  The Complaint alleges that Defendants often cycled the Layering Algorithm on and off several times during a typical trading day to create large imbalances in the E-mini S&amp;P visible order book to affect the prevailing E-mini S&amp;P price.  Defendants then allegedly traded in a manner designed to profit from this temporary artificial volatility.<br>
  (<a href="http://www.cftc.gov/PressRoom/PressReleases/pr7156-15#PrRoWMBL" rel="nofollow">http://www.cftc.gov/PressRoom/PressReleases/pr7156-15#PrRoWMBL</a>)</p>
</blockquote>

<p>The offical verdict has a <a href="http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf" rel="nofollow">step-by-step walkthrough</a></p>

<p><strong>If the trader participated only in legitimate voluntary trades via the normal market mechanism, what exactly is the behaviour that is being considered as potentially illegal here, and what is the rationale for this illegality (i.e. how can the authorities distinguish this seemingly illegal behaviour from normal market trading activity)?</strong></p>

<blockquote>
  <p>Sarao was charged in a federal criminal complaint in the Northern District of Illinois on Feb. 11, 2015,  with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, <em>and one count of “spoofing,” a practice of bidding or offering with the intent to cancel the bid or offer before execution.</em>
  (<a href="http://www.justice.gov/opa/pr/futures-trader-charged-illegally-manipulating-stock-market-contributing-may-2010-market-flash" rel="nofollow">http://www.justice.gov/opa/pr/futures-trader-charged-illegally-manipulating-stock-market-contributing-may-2010-market-flash</a>)</p>
</blockquote>

<p>The relevant articles for spoofing are: Title 7, United States Code, Sections 6c(a)(5)(C) and 13(a)(2) </p>

<blockquote>
  <p>(5) Disruptive practices<br>
  It shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that-<br>
  (A) violates bids or offers;<br>
  (B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or<br>
  (C) is, is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).</p>
</blockquote>

CC BY-SA 3.0
2015-04-22T20:18:19.583Z
I'd be very interested in what new information appeared that exonerated Waddell & Reed (http://www.reuters.com/article/2010/10/04/us-flashcrash-nanex-idUSTRE6935SA20101004). Though whether it actually is new information is questionable given that Nanex already had an explanation, which seems more in line with this, half a year later: http://www.nanex.net/aqck2/4150.html
user45891
CC BY-SA 3.0
2015-04-22T20:15:22.473Z
2015-04-22T20:15:22.473Z
user45891
<p>A British trader has been arrested on accusations of having triggered the 2010 "flash crash" that saw the Dow plummet by 600 points in 20 minutes. This is reported, for example, <a href="http://www.bbc.co.uk/news/business-32415664" rel="nofollow">here</a> (BBC), or <a href="http://www.ft.com/cms/s/0/fc3a66a8-e84a-11e4-baf0-00144feab7de.html#axzz3XsNsAwbn" rel="nofollow">here</a> (FT, paywalled). In these reports, it is claimed that the crash was triggered by some sort of irregular trading in a type of futures contracts called eMinis.</p>

<p>Can someone explain</p>

<ol>
<li>What exactly is it that the trader is alleged to have done, how did this allow him to make irregular profits, and what is the mechanism by which he was able to single-handedly move the entire equities index?</li>
<li>If the trader participated only in legitimate voluntary trades via the normal market mechanism, what exactly is the behaviour that is being considered as potentially illegal here, and what is the rationale for this illegality (i.e. how can the authorities distinguish this seemingly illegal behaviour from normal market trading activity)?</li>
</ol>

<finance><law>
2010 flash crash: cause and rationale for illegality
Ubiquitous
# 2010 flash crash: cause and rationale for illegality

(Asked by: username_0 on 2015-04-22)

A British trader has been arrested on accusations of having triggered the 2010 "flash crash" that saw the Dow plummet by 600 points in 20 minutes. This is reported, for example, [here](http://www.bbc.co.uk/news/business-32415664) (BBC), or [here](http://www.ft.com/cms/s/0/fc3a66a8-e84a-11e4-baf0-00144feab7de.html#axzz3XsNsAwbn) (FT, paywalled). In these reports, it is claimed that the crash was triggered by some sort of irregular trading in a type of futures contracts called eMinis.

Can someone explain

1. What exactly is it that the trader is alleged to have done, how did this allow him to make irregular profits, and what is the mechanism by which he was able to single-handedly move the entire equities index?
2. If the trader participated only in legitimate voluntary trades via the normal market mechanism, what exactly is the behaviour that is being considered as potentially illegal here, and what is the rationale for this illegality (i.e. how can the authorities distinguish this seemingly illegal behaviour from normal market trading activity)?

**Tags:** finance, law

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## 1 answers

### Answer by username_1 on 2015-04-22. Score: 4 | Accepted answer

**What exactly is it that the trader is alleged to have done, how did this allow him to make irregular profits, and what is the mechanism by which he was able to single-handedly move the entire equities index?**

> According to the Complaint, for over five years and continuing as recently as at least April 6, 2015, Defendants have engaged in a massive effort to manipulate the price of the E-mini S&P by utilizing a variety of exceptionally large, aggressive, and persistent spoofing tactics. In particular, according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&P central limit order book (the Layering Algorithm), with each sell order one price level from the other. As the E-mini S&P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price.  
> Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions. According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days.  
> The Complaint alleges that Defendants often cycled the Layering Algorithm on and off several times during a typical trading day to create large imbalances in the E-mini S&P visible order book to affect the prevailing E-mini S&P price. Defendants then allegedly traded in a manner designed to profit from this temporary artificial volatility.  
> (<http://www.cftc.gov/PressRoom/PressReleases/pr7156-15#PrRoWMBL>)

The offical verdict has a [step-by-step walkthrough](http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf)

**If the trader participated only in legitimate voluntary trades via the normal market mechanism, what exactly is the behaviour that is being considered as potentially illegal here, and what is the rationale for this illegality (i.e. how can the authorities distinguish this seemingly illegal behaviour from normal market trading activity)?**

> Sarao was charged in a federal criminal complaint in the Northern District of Illinois on Feb. 11, 2015, with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, *and one count of “spoofing,” a practice of bidding or offering with the intent to cancel the bid or offer before execution.*
> (<http://www.justice.gov/opa/pr/futures-trader-charged-illegally-manipulating-stock-market-contributing-may-2010-market-flash>)

The relevant articles for spoofing are: Title 7, United States Code, Sections 6c(a)(5)(C) and 13(a)(2)

> (5) Disruptive practices  
> It shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that-  
> (A) violates bids or offers;  
> (B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or  
> (C) is, is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).

> **Comments:**
> **username_1**: I'd be very interested in what new information appeared that exonerated Waddell & Reed (http://www.reuters.com/article/2010/10/04/us-flashcrash-nanex-idUSTRE6935SA20101004). Though whether it actually is new information is questionable given that Nanex already had an explanation, which seems more in line with this, half a year later: http://www.nanex.net/aqck2/4150.html  

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