U.S. accuses London trader of helping cause 2010 "flash crash"

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[February 04, 2016]  By Michael Holden

LONDON (Reuters) - A London-based trader's market manipulation helped cause the 2010 Wall Street "flash crash" which netted him some $878,000 profit, a prosecutor for U.S authorities seeking his extradition said on Thursday.

Navinder Sarao, arrested by British police on a U.S. warrant last April, has been indicted by a U.S. federal grand jury on 22 criminal counts including wire fraud, commodities fraud and attempted price manipulation. He has denied any wrongdoing.

Mark Summers, for the United States, said Sarao had used modified computer software to "spoof" the Chicago Mercantile Exchange (CME) market by placing buy or sell orders that were modified millions of times and then canceled before they could be executed.

Having manipulated the market, he then placed genuine orders making a large profit in the process.

Summers said it was the United States' case that Sarao's actions had helped cause market instability which spread from the CME, leading to the flash crash on May 6, 2010 when the Dow Jones Industrial Average briefly plunged more than 1,000 points, temporarily wiping out nearly $1 trillion in market value.

"The government alleges that the defendant on this day was heavily engaged in his spoofing activities," Summers told Westminster Magistrates Court in London at the start of Sarao's two-day extradition hearing.

"He was, through that activity, contributing to that market imbalance," he added. "Along with other factors that were happening on that day, that market imbalance contributed to the flash crash."

If Sarao is extradited and convicted, the maximum U.S. sentences for the charges of which he is accused amount to more than 350 years in prison.

"GETTING HIT ON THE SPOOFS"

Summers said the Briton, running a one-man operation, Nav Sarao Futures Ltd from his parents' home near Heathrow Airport in west London, had used his specially adapted software to keep his trades from being executed by modifying or cancelling them.

"If I'm short I want to spoof it down," Sarao wrote in an email to the computer programmer.

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Summers told the court that on May 4, 2010, Sarao had placed orders which were modified 7.4 million times, accounting for 42 percent of all modifications on the CME that day.

But the system was not foolproof and he had complained that some of his orders were being executed. In another email to the programmer, he said he was "getting hit on his spoofs and it was costing him too much money," Summers said.

On the day of the flash crash, however, he made $878,000 while his biggest single day's profit from alleged spoofing came on Aug. 4, 2011 when he made $4 million.

"Overall he made some $40 million by spoofing ... the market from his home ... in London," Summers said.

In court papers, Sarao's lawyers argue the orders he placed were genuine and that because his conduct was not criminal in Britain, he should not be extradited.

If the judge approves extradition, the decision must be ratified by Britain's interior minister Theresa May, and his lawyer said it was very likely Sarao would appeal.

(Editing by Catherine Evans)

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