united-states finance cftc
What was wrong with the 2010 Flash Crash?
<p>While looking for recent market crashes, I came upon <a href="https://en.wikipedia.org/wiki/2010_Flash_Crash#Evidence_of_market_manipulation_and_arrest" rel="nofollow noreferrer">2010 Flash Crash</a>. However, I am unable to understand what wrong the alleged perpetrator, Navinder Singh Sarao, did.</p>
<p>Entering an &quot;<strong>order to sell stocks (or shares)</strong>&quot; and &quot;<strong>then cancelling those orders</strong>&quot;, should not a crime, should it? A trader (or an investor) can change his or her mind at any time before the order goes through.</p>
<p>I am not saying that nothing went wrong, but just trying to understand.</p>

<p><a href="https://www.justice.gov/opa/pr/futures-trader-charged-illegally-manipulating-stock-market-contributing-may-2010-market-flash" rel="noreferrer">The criminal complaint against Sarao</a> can be found on the US Department of Justice's website.  He was charged under four different sections of US Code:</p>

<ul>
<li><p><a href="https://www.law.cornell.edu/uscode/text/18/1343" rel="noreferrer">18 USC 1343</a>, which prohibits the use of inter-state or foreign telecommunications in the furtherance of a fraudulent scheme.  </p></li>
<li><p><a href="https://www.law.cornell.edu/uscode/text/18/1348" rel="noreferrer">18 USC 1348</a>, which prohibits fraud concerning securities and commodities markets.</p></li>
<li><p><a href="https://www.law.cornell.edu/uscode/text/7/13" rel="noreferrer">7 USC 13(a)(2)</a>, which prohibits manipulation of commodities markets.</p></li>
<li><p><a href="https://www.law.cornell.edu/uscode/text/7/6c" rel="noreferrer">7 USC 6c(a)(5)(C)</a>, which specifically prohibits "spoofing" of commodities markets. </p></li>
</ul>

<p>It's this last one that you seem to be most interested in.  Spoofing is defined as "bidding or offering <strong>with the intent</strong> to cancel the bid or offer before execution."  In other words, it's legal to change your mind after you place an order, but it's not legal to place an order that you have no intent of following through on.  This section was actually enacted as part of the Dodd-Frank Act, which took effect a few months after the "Flash Crash";  the charge against Sarao under this section stemmed from actions he took later, in 2014.</p>

<p>The charges against Sarao specifically relating to the "Flash Crash" were under the wire fraud and securities fraud statutes instead.  In the end, Sarao pled guilty to one count of wire fraud (covering his ongoing actions from 2009–2014) and one count of spoofing, presumably as part of a plea deal.  </p>

<p>I imagine it's not a crime to change your mind before the order goes through, but that's not really what this guy did. The allegation is instead that he never intended to follow through on those orders in the first place.</p>

<p>Entering an order to sell stocks and then canceling those orders is a crime if its done with an intent to manipulate the market, which is what the government alleged.</p>

<p>Under <a href="https://www.law.cornell.edu/uscode/text/15/78i" rel="noreferrer">15 USC 78i</a>, it is illegal to use any instrumentality of interstate commerce (mail, phone, Internet, etc.) with a "purpose of creating a false or misleading appearance of active trading in any security."</p>

<p>Securities law is a bit technical and well outside my wheelhouse, but the folks responsible for regulating it seem to write the laws pretty broadly to ensure that people who are not acting in good faith can be punished.</p>
