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Hound of Hounslow shows non-regulation of banks remains extremely dangerous

Howlsnow in HounslowNo-one had heard of Navinder Singh Sarao until on 6 May 2010 he ‘spoofed’ the international stock markets while sitting in his room in his parents’ semi in Hounslow and made $879,000 on that day alone and, it is alleged, $40 millions fraudulently over 5 years. He is now awaiting extradition to the US to face charges. But the crucial points are that one lone individual (though his connections with several big names in finance have been noted) could generate a ‘flash crash’ causing a loss of £1 trillion of stock market value albeit very temporary) and what damage might be done by market operators with bigger financial resources.

What lies behind Sarao’s scam is the phenomenon of high-frequency trading (HFT), made possible in today’s financial markets by immense computing power created. There is what might be called an arms race among HFT firms to execute trades faster and faster. Andrew Haldane, the Bank of England’s chief economist, said in 2011 (and it will be faster today) that the lower limit for trade execution was around 10 micro-seconds, i.e. in principle it would be possible to execute around 40,000 back-to-back trades in the blink of an eye. To put that in domestic terms, if supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second. Ponder that.

Why does speed matter? Because exploiting tiny and temporary differences in price between a quote in, say, London and New York or Hong Kong can be profitable. But your computer programme has to be quicker than anyone else’s by that crucial micro-second. It also matters because HFT is not some exotic pastime on the margins; it’s now reckoned that it accounts for three-quarters of trading on US stock markets.

So where does Sarao fit into all this? He sent out a series of ‘sell’ orders that he intended to cancel, but which created the illusion of downward pressure on the market. As other computers reacted to that artificial pressure, he would profit by buying at a lower price and then selling when prices returned. All wrapped up in half an hour.

The biggest question raised by the flash crash is whether the high-speed merchants have made the stock trading system radically unsafe for everyone. It is already a million miles away from the traditional role of stock markets as places where informed buyers would meet informed sellers and where companies could go to raise capital to fund investment. Of course if ‘spoofers’ rip off the HFT spivs, perhaps nobody should be worried. But the risk is whether this scam will be further exploited on a much bigger and more systematic scale which could seriously damage the real economy. So why have the regulators taken no action to stop these practices since May 2010?

2 Comments

  1. Barry Ewart says:

    Good points, as I mentioned a while ago a book was reviewed in the Guardian recently about the scandal on Wall Street of ‘Scalpling’ (taking tiny amounts from large share purchases using sophisticated computer systems).
    The book is called ‘Flash Boys.”

  2. Barry Ewart says:

    Footnote – full title of book is ‘Flash Boys: A Wall Street Revolt’ by Michael Lewis (March 2014).

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