Alleged 'Flash Crash' Trader Formally Indicted In U.S.

By Scott Neuman

Published September 3, 2015 at 4:35 PM CDT

Navinder Singh Sarao leaves Westminster Magistrates' Court in London last month. He has been indicted by U.S. prosecutors on charges of market manipulation that contributed to the Wall Street "flash crash" in 2010.

U.S. federal prosecutors are seeking the extradition of London-based day trader Navinder Singh Sarao on charges of market manipulation that they say triggered the May 6, 2010, "flash crash" in which the Dow lost 10 percent of its value in a matter of minutes.

It was made public Thursday that Sarao, 36, who was arrested in the U.K. in April with bail set at $7.5 million, was being formally charged in the United States.

He's accused of using an automated trading program to "spoof" the markets: The program allegedly generated large sell orders that caused a rush by other investors to dump shares. Prosecutors say Sarao's orders were never executed, but he bought shares cheaply and sold them at a profit when the market quickly rebounded.

The Economist wrote in 2010 that "some blue-chip shares briefly trading at a penny, only to recover most of the lost ground before the end of the trading day. The short-lived plunge raised awkward questions about whether trading rules had failed to keep up with markets that now handle orders in milliseconds."

As NPR's Jim Zarroli reported at the time of Sarao's arrest:

"May 6, 2010 started out as an ordinary trading day on Wall Street. Then, at around 2:45 in the afternoon, the Dow Jones industrial average plunged nearly 600 points within the space of a few minutes, before correcting itself.

"This week, officials blamed the episode on a little-known trader who worked from his parents' home in London, using computer software he'd modified himself. But questions remain about who was really to blame."

Sarao is believed to have earned some $900,000 on the day of the flash crash alone and to have made illegal profits of $40 million from 2010 to 2014.

According to Reuters, the indictment made public today "contained the same criminal charges announced [at the time of his arrest] in the spring, which include wire fraud, commodities fraud, commodity price manipulation and attempted price manipulation."

As Jim explains, the arrest of Sarao "has only underscored how opaque the market remains. Sarao was no Wall Street titan. He was a lone trader working out of the West London neighborhood of Hounslow."