A U.K. futures trader contributed to the May 2010 flash crash by engaging in illegal bait-and-switch practices, U.S. authorities said.
The trader, 37-year-old Navinder Singh Sarao, was arrested in the U.K. on Tuesday, and the U.S. is seeking his extradition, the Justice Department said in a statement. Mr. Sarao, who ran his own trading shop, was charged with wire and commodities fraud in a criminal complaint filed in federal court in Illinois.
The Justice Department and the Commodity Futures Trading Commission, which filed a separate lawsuit, said Mr. Sarao engaged in trading strategies known as “layering” and “spoofing” that contributed to the flash crash of May 6, 2010, when the Dow Jones industrial average plunged 1,000 points in just minutes before later recovering some of the losses.
The day left regulators and investors searching for answers. The CFTC and Securities and Exchange Commission released a report five months after the decline pointing a finger at a jittery market during the European debt crisis, one mutual fund's large trade and automated traders accelerating their buying and selling and then withdrawing from the market.
Mr. Sarao was “a significant factor in market imbalance,” CFTC Enforcement Director Aitan Goelman said on a conference call with reporters Tuesday. “Market imbalance was one of the chief conditions that allowed the flash crash to occur.”
Although the U.S. says Mr. Sarao's illegal activities spanned at least June 2009 through April 2014, the government gave special attention to what happened during the flash crash.
Spoofing and layering involve submitting market orders with no intention of filling them, with a goal of pushing prices in a direction favorable to a trader's strategy.
Mr. Sarao “effectively tethered his orders to the market price, constantly modifying them so that they moved up and down with the market, remaining several ticks above the best offer,” according to the Justice Department's complaint.
The strategy “virtually ensured” that his orders wouldn't be filled and Mr. Sarao almost always canceled his bids without executing them, the complaint said. Mr. Sarao ran a trading company called Nav Sarao Futures Ltd., according to the CFTC's complaint.