Shocking Study Reveals Super Villain Navinder Sarao Might Not Be Wholly Responsible For The Flash Crash

It's almost like this whole thing never made sense in the first place.

One of the greatest financial criminal masterminds of our time might actually go free on a technicality, and that technicality is logic.

We all remember Navinder Sarao, the 30-something dude who was arrested and charged this summer for causing the 2010 "Flash Crash" while trading futures from a computer in his bedroom in his parents' house.

Sarao was arrested in his sweatpants, charged by a British court and then indicted by a federal grand jury in Chicago. It felt so good to watch justice work so swiftly five years after the fact to punish one guy for a systematic failure related to high-frequency trading.

But like all fairy tales, the fall of Navinder Sarao might be a little light on facts...

Sarao may not have had a material, or even any, impact on the bout of equity market volatility in May 2010 that later became known as the flash crash, according to a draft research report by University of California, Santa Cruz and Stanford University professors dated Jan. 25. The study, which has yet to be formally released because the authors are still soliciting feedback, claims to be the first to analyze the entire order book on a millisecond level.

Ruh roh. How is it possible that Sarao alone didn't crash the Dow by pretending he was going to move $200 million?

Still, industry experts have questioned how a single trader could have had such an impact on U.S. markets. That the causes of the Dow Jones Industrial Average’s nearly 1,000-point plunge in May 2010 are still being debated reflects dissatisfaction with regulators’ ability to analyze electronic, computer-traded markets that have been described as too complex and as unfair to ordinary investors.

But a guy with limited financial education working alone must have known what his behavior would do to the global economy...

“Our analysis suggests that this view incorrectly conflates correlation with causation: just because Sarao’s trading occurred at or around the time of the flash crash, does not establish that it helped cause the flash crash,” [researchers] said.
The professors also argue that Sarao couldn’t have known in advance that his trading could destabilize markets. That matters because U.S. sentencing guidelines take into consideration whether harm was foreseeable, they said in the paper.

Lady Justice, she weeps.

Study Says Sarao May Not Have Been Responsible for Flash Crash [Bloomberg]