Flash Crash
By Rosie Lu, Taiwan FLY
On May 6, 2010, the financial world was captivated by the actions of a trader named Navinder Singh Sarao within the Chicago Mercantile Exchange. Sarao, a practitioner of high-frequency trading using a computer program, focused his efforts on a specific financial product known as E-mini.
His activities had not escaped notice. Authorities within the Chicago Mercantile Exchange sent emails to his brokerage firm, GNI, highlighting that within a mere five minutes, 1,613 of his client's trades were rejected. Sarao's competitors also observed a peculiar pattern where his orders lingered in the system only to disappear when execution was imminent. Alarmed, GNI forwarded the exchange's email to Sarao, urging him to reconsider his actions.
In response, Sarao sent an email to the exchange and his broker, offering apologies for any inconvenience caused. He asserted that he was merely illustrating the unpredictable nature of the market to friends and queried whether the exchange's notice signified an end to the manipulation by high-frequency traders. Unperturbed, he pressed on with his trading program.
Simultaneously, the United Kingdom was navigating through a crucial election, grappling with political uncertainties. Despite appearing indifferent to political matters, Sarao astutely recognized the potential impact of these uncertainties on the market. His trading strategy was centered around exploiting market volatility, strategically positioning himself during periods of turmoil. The accumulation of his wealth was attributed to about 20 specific days throughout his investment career.
Fast forward to the afternoon of May 6, a day marked by the financial turmoil surrounding the Greek debt crisis. At 3:20 PM Chicago time, Sarao set his automated trading program into action. Utilizing the "cancel if close" function, he placed four sell orders above the best bid, totaling 21 million USD. Over the next six minutes, these orders automatically canceled and re-entered the market, consistently maintaining a fixed distance from the best bid to prevent execution. By deactivating the algorithm, Sarao witnessed a significant 39-point drop in the market.
The atmosphere was charged with tension as news of protests in Greece and escalating concerns about Eurozone stability dominated the financial landscape. Sarao's short-term trading approach appeared rational in this scenario. While markets typically take weeks to stabilize during an uptrend, corrections during downtrends can be swift. Sarao aimed to position himself strategically for profit during these rapid reversals, and the accumulation of his wealth attested to the success of this approach.