Let’s get this straight: The FBI thinks a guy in London living in his family’s basement took down the biggest, most liquid, most trusted stock market in the world.
And to add insult to injury, this bathrobe-clad hacker used MF Global — the same firm led by former NJ governor, senator and previous contender for Treasury Secretary Jon Corzine — as his broker.
Navinder Singh Sarao, 36, was arrested by Scotland Yard and charged by the United States with 22 counts of fraud and market manipulation.
Sarao’s “trading ploy” was spoofing.
To give you an idea of what sort of hacker types the markets are dealing with these days, try following this scenario.
In June 2009, Sarao was on the hunt for a programming technician who could create a “Spoofing Robot,” an automated fake-order-making and split-second cancellation piece of software code — aka a hacker.
By designing and deploying high-speed automated software to flood the system with bogus orders, he initiated a scheme to attempt to drive prices down far and quickly.
It is truly doubtful that a guy in his pajamas could intentionally send the market down 1,000 Dow points on his own.
But remember, these hackers are like cockroaches — where there’s one, there’s a thousand — and when they swarm, look out.
They pile on, recognizing the gamesmanship and the “mark” (aka manipulation).
Their actions also have some unintended consequences, like triggering other, legitimate software trading programs into initiating sell programs based on volumes on offers and bids and actual price movements.
These high-frequency traders are more akin to hackers than bona-fide risk-reward capital markets traders.
That said, this is exactly the kind of flagrant illegal market manipulating that Corzine’s MF Global should really have picked up on.
MF Global, the now-defunct overleveraged derivative brokerage operation, had an obligation to “know thy customer” and be aware if sham trades were being entered and canceled without the intent of being executed.
While Corzine probably had no knowledge of such antics, the team he hired to oversee the E-mini futures trading should have picked this up. This is the type of client that a derivatives broker ought to have turned in to the authorities, no matter how profitable that line of business or a client may have been.
Market manipulation and entering trades with the intention of never having them get executed is an unhealthy byproduct of a small but powerful army of hacker-type high-frequency traders.
The market’s first line of defense against such low-lifes is the derivatives brokers and exchanges themselves.
There is no public report of MF Global having restricted Sarao’s trading or contacting authorities in the public domain, which leads one to safely assume that MF Global failed to properly shut down Sarao’s manipulative scheme.
Then again, MF Global couldn’t even oversee its own conduct.