Sarao: Making A Monkey Of The Markets And The Regulators

I have only been to the U.S. once. It was in 1991, to Los Angeles, just before Rodney King was beaten up. California, apart from the LAPD, struck me as a great place. But you would not want to get on the wrong side of the law. Indeed, given the totally one-sided extradition rules, even those of us Brits who may even accidentally find ourselves in the gaze of the U.S. authorities will find that a one way trip Stateside will be served up quicker than you can say Star Spangled Banner. This is not necessarily a reason to quibble; it is just the way it is.

Those of us interested in the financial markets are reminded of this in the wake of the alleged Flash Crash perpetrator Navinder Singh Sarao. The Flash Crash was five years ago, while the US Commodity Futures Trading Commission (CFTC) is focusing on Sarao only now. If there was a systemic weakness in the index trading it is quite pathetic it has taken so long to catch up with the Hound of Hounslow – there could have been a flash crash every month in the meantime.

What market observers and indeed the general public are now being led to believe is that Sarao is yet another in a long line of rogue traders who started off with Nick Leeson 20 years ago. This may be the case. But it actually looks as though it is the usual phenomenon we see with “crimes” in the financial markets: a mixture of envy, scapegoating, ignorance and above all, the rush to close a stable door after the horse has bolted.

We are reminded once again that regulators seem to be skilled in punishing/fining the results of their own incompetence. There will probably be more to emerge from the Sarao episode apart from a British citizen being thrown to the lions – the Department of Justice. It is that he will be given a disproportionately tough punishment, and when it comes to trading, the “house” always wins.

And when it loses it can change the rules/law so that it wins. This looks to be what will emerge from this case. For instance, presumably to spoof and layer the E Mini S&P was not illegal 5 years ago and there was no rule or block on orders in the system that prevented it. The acid test is arguably that if Mr Sarao had lost £26m on the markets no one would have done or said anything, apart from to call the man a fool.

The problem here is that it was an individual who made the cash, an independent person who cannot be hit by a retrospective fine, and does not belong to the cosy Wall Street or City of London clubs overseen in a totally arbitrary way by the regulatory protection racket which was started from the time of Big Bang. One presumes that spoofing and layering is carried out on a daily basis on the foreign exchanges, stock market and commodities markets. But it is fine if practised by one of the big trading houses – as they are in the fold.

That said, if it turns out that Sarao is an evil, greedy criminal, everyone I am sure would wish justice to be done. However, even at this initial stage the affair does appear to be an example of retrospective retribution as a result of someone being asleep at the wheel and trying to cover their back. Whatever happens, this will not eclipse the way that a private trader successfully made a monkey of the markets and even worse, the regulators.