The Economist has a fascinating summary of the story behind the story. In a nutshell, a 36-year-old British day-trader named Navinder Singh Sarao, a British day-trader who the U.S. government wants to extradite on a laundry list of charges, was reportedly the trigger event.
Market watchdogs would not have expected the source of the "flash crash", as it came to be known, to be a lone trader based in a nondescript semi-detached house in Hounslow, an unfashionable suburb nestled between central London and Heathrow airport. But they would be less surprised by the methods he is accused of using, most notably "spoofing", a common form of market manipulation.
According to the charge sheet, Mr Sarao would routinely place a series of orders to sell futures contracts that would only be profitable if the S&P 500 share index fell. The authorities claim that a computer programme he devised constantly tweaked the price of his orders to ensure he wasn’t taken up on them. The effect, nonetheless, was to inject pessimism in the futures market, by making it look like lots of investors were expecting prices to drop. (Part of this bearishness spilled over into the stockmarket, causing shares to fall in price.) Mr Sarao, it is claimed, used this as an opportunity to buy cheaply...
...Mr Sarao appeared in court in London on April 22nd, but only to fight extradition. The American authorities claim he made a profit of just $879,018 from the trades linked to the flash crash—a pittance compared to the upheaval caused—though perhaps $40m from subsequent manipulation. Awkwardly, he funnelled his profits from trading to a firm called "Nav Sarao Milking Markets Limited", based in Nevis, a Caribbean tax haven, although he has no obvious ties to the dairy industry.
Why Mr Sarao’s continued use of similar trading strategies did not cause markets to convulse again is not clear. Nor is it established that he was the sole cause of the S&P’s swoon, as the American complaint in effect concedes. It claims he was "at least significantly responsible for the order imbalance that in turn was one of the conditions that led to the flash crash". That leaves plenty of blame to go around.
Regulators had previously thought a mega-investor such as a mutual fund must have had a hand in the mysterious event... That Mr Sarao might be even partly to blame will only add to the alarm the flash crash engendered. Many will ask how a single day-trader could possibly have been allowed to generate $200m of selling orders, over a fifth of the daily volume in the contract he favoured, during a period of known market convulsion without having been blocked by one party or another. The financial watchdogs, who had suggested the blame lay elsewhere, will also have questions to answer. The most pressing of them will be, if a trader from Hounslow can cause the S&P 500 to crash, who or what else could do the same—or worse?
Upon reading this, I immediately thought "Tyler Durden" of Zero Hedge. The financial website, in my view, was founded in part to warn investors of the dangers related to high-frequency trading (HFT), the programmatic bait-and-switch schemes used to manipulate markets.
Sure enough, Durden had the same idea I had:




















