The complaint alleges that Sarao “used an automated trading program to manipulate the market for E-Mini S&P 500 futures contracts (E-Minis) on the Chicago Mercantile Exchange (CME),” according to the DOJ.
By manipulating these futures tied to the Standard & Poor’s 500 Index, Sarao allegedly “earned him significant profits and contributed to a major drop in the U.S. stock market on May 6, 2010, that came to be known as the ‘Flash Crash,’ ” the DOJ said in a release.
During that market event, the Dow plummeted about 600 points in approximately five minutes after E-Minis quickly tanked.
According to the complaint, Sarao allegedly used a “layering” strategy—a form of spoofing where “a trader places multiple, bogus orders that the trader does not intend to have executed.” These fake orders could manipulate a price by tricking other trading participants into falsely believing there is either increased supply or demand for a security.
Layering is a more complicated form of normal spoofing because it implies that there are many orders as opposed to just a single fake price, according to Joe Saluzzi, partner and co-founder of Themis Trading.
“Now here we are five years after the report and finally someone’s recognizing it was a spoofer,” said Sal Arnuk, another partner and co-founder of Themis Trading.
He called it “shocking and scary” that it took authorities five years to charge anyone for the flash crash.
The complaint said that Sarao engaged in discussions with the CME about his trading activities, and suggested in a 2010 email that he had “just called” the exchange “and told em to kiss my [a–].”
The CFTC’s Goelman alleged that Sarao is believed to have engaged in market manipulation or spoofing on about 400 days between 2010 and 2014, and continued doing so as recently as this year.
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