Posted by Sukayna Khalifeh.
Spoofing became illegal in 2010 when an amendment stating that “bidding or offering with the intent to cancel the bid or offer before execution” was added to the Commodity Exchange Act. Navinder Singh Sarao was criminally charged for this so-called spoofing, because he was allegedly driving down the price of stocks of Standard & Poor on purpose by making other traders sell their stocks, and then at the last minute, buy those stocks himself and cancel his hoaxed sell orders. He would make a profit after the price came back up and everything goes back to normal. According to the New York Times (Henning), the government also thinks that he was one of the causes that lead to the “flash crash” in May 2010, where the “Dow Jones industrial average dropped nearly 1,000 points in just a few minutes before quickly recovering.” This was proven not to be the case when the blame was actually pinned on Waddell & Reed Financial in 2010 and Sarao was still placing orders after that yet no sudden drops in the market occurred. This proves the government had made the wrong analysis.
Henning brings up a question of whether there is enough proof to call this process a fraud. If it is constituted as one, then Navinder Singh Sarao might have to be deported to Britain by the government. According to the Commodity Futures Trading Commission, since 2009, Sarao had made about $40 million just by spoofing. Sarao counter argues that this is just the way he trades and that he had made this estimated profit within 20 trading days. Henning also describes that the “victims of Mr. Sarao’s orders are not ordinary investors” but they are instead “sophisticated investors who use algorithms that try to predict where the market is headed.” This brings up the fact that these sophisticated or high frequency investors are most likely the ones caught with spoofing charges. So, is this actually affecting or “harming ordinary long-term investors” (Henning)? This type of fraud is still violating the law regardless of who the victims are but according to the New York Times (Henning), these high frequency investors, with their access to data about large orders, could have easily adjusted their algorithms to find out what type of orders Sarao used. In that process, they would not have fell for the scheme.
Also, it is not obligatory that once you enter an order it must be filled. According to the New York Times (Henning), “more than 90 percent [of orders] are estimated to be cancelled.” This is not considered to be spoofing since the order might be filled. Henning views this as an illustration of the “fine line between accepted practices and illegal conduct.”
In order for Sarao to be extradited to Britain, the Justice Department must prove that he had true intention of not filling the order after entering them in. Also, the British court can block this extradition if it “would not be in the interests of justice” (Henning).
According to the New York Times (Henning), this case took the prosecutors six years to put together and will take them a little while longer to find out if Sarao actually committed fraud.
Sukayna is a double major in finance and management, information and technology (MIT), Class of 2017.