Flash crash arrest lays bare regulatory lapses at all levels -- starting with CME Group

Section:

By Dave Michaels, Matthew Leising, and Sam Mamudi
Bloomberg News
Wednesday, April 22, 2015

CME Group Inc. concluded within four days of the 2010 flash crash that algorithmic trading on futures exchanges didn’t exacerbate losses in the market.

When Washington regulators did a five-month autopsy in 2010 of the plunge that briefly erased almost $1 trillion from U.S. stock prices, they didn't even consider whether it was caused by individuals manipulating the market with fake orders.

Their analysis was upended Tuesday with the arrest of Navinder Singh Sarao -- a U.K.-based trader accused by U.S. authorities of abusive algorithmic trading dating back to 2009. Even that action was spurred not by regulators' own analysis but by that of a whistle-blower who studied the crash, according to Shayne Stevenson, a Seattle lawyer representing the person who reported the conduct.

The episode shows fundamental cracks in the way some of the world's most important markets are regulated, from the exchanges that get to police themselves to government agencies that complain they don’t have adequate resources to do their jobs.

Regulators were aware of Sarao's trading behavior as early as 2009, when officials at CME -- which runs the exchange where Sarao allegedly placed his problematic trades -- spotted him placing and then canceling large numbers of orders, and warned him against placing deceitful trades, according to an FBI affidavit. Sarao continued to manipulate markets through March 2014, the FBI said.

"How this continued for six years when the CME appeared to know about, it kind of boggles my mind," Dave Lauer, president of Kor Group, a lobbying and research firm, said by phone. "This is about as simple and easy as you can get, and it took them this long to do anything about it." ...

... For the remainder of the report:

http://www.bloomberg.com/news/articles/2015-04-22/flash-crash-arrest-lay...



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