Panelists: British high-speed trader could not have caused “Flash Crash”

By Brian MacIver and Lucy Ren
Medill News Service

CHICAGO – Bloomberg columnist Matt Levine raised eyebrows Friday at the annual conference for the Society of American Business Editors and Writers, saying that everyday Americans don’t need to understand the internal workings of the financial markets.

Speaking during a panel discussion, Levine responded to a question from NPR’s Marilyn Geewax who asked the panel if the intricacies of high-speed trading and the financial market as a whole are relevant for average Americans.

“I think it’s a mistake to think that ordinary Americans need to understand equity market structure,” Levine said. “There’s a weird perception that people are supposed to understand the stock market in a way that they are not expected to understand dentistry.”

Levine took an opposing stance to Eric Budish, an associate professor of economics at the University of Chicago, who had just said “given that this is an important phenomenon that’s relevant to understanding modern financial markets, it’s good” for the public to know.

However, the two did agree that a single spoofer like Navinder Singh Sarao could not have caused the “Flash Crash” of 2010 when the Dow Jones Industrial Average plummeted approximately 1,000 points, or 9 percent, within minutes, marking the biggest one-day point decline in the index’s history.

Rather, a series of stock market manipulation and other factors led to the rapid drop and rise in the financial market.

Sarao, a lone high frequency trader who was arrested this week in Great Britain, is accused of reaping more than $40 million in profits by placing and cancelling large orders with no intention of the orders resulting in transactions, an illegal technique known as spoofing.

“It’s implausible to me that this one guy could have exacerbated uncertainty to the point where no one wants to make markets anymore,” Budish said. In retrospect, he thinks the relatively high uncertainty in the market had set the scene for the historic crash.

Levine pointed out that the drastic stock market dip took place a couple of minutes after Sarao had turned off his high frequency trading algorithm. The few minutes of lag in market reaction indicate that “other bad stuff,” such as worries about the debt crisis in Greece, contributed to the unstable condition, causing enough people to be nervous, and eventually the diminishing market liquidity, he said.

Nick Baker, also of Bloomberg News, expressed frustration over regulators spending nearly five years to identify the high frequency trader’s misbehavior

Levine countered that identifying spoofing is not a simple task and that canceling up to 99 percent of his trades did not make Sarao a spoofer.

“People put in orders that they don’t trade on all the time,” he added. As prices move, traders are constantly getting information and updating their positions.

In an interview following the session, Levine said that high frequency trading has made the market better.

“There are controversial things that need to be improved upon, but if you were to get rid of speedy computerized trading, market would clearly be worse,” Levine said.

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