Washington: The notion that one man trading from his parents' house in a working class London suburb had a material role in the 2010 Wall Street flash crash has aroused increasing scepticism from investors and traders since charges were brought on Tuesday.
The US has asked UK authorities to hand over Navinder Singh Sarao, 36, after his arrest this week on charges that he manipulated markets over several years in a fraudulent scheme that helped cause the stock market rout.
(Read: Navinder Singh Sarao arrested for 2010 US market crash)
The US Department of Justice alleges that Mr Sarao used souped-up, off-the-shelf software to trick other market participants into thinking massive sell orders were about to hit, causing the so-called E-mini S&P futures prices to drop so he could buy at cheaper levels. In doing so, he made $40 million in profits, US authorities allege.
But traders doubt that Mr Sarao could have had the upper hand in a market dominated by Wall Street firms with powerful computer trading programs and huge technology budgets.
The charges against Mr Sarao, operating far from the centre of US markets and engaging in activity some believe occurs every day among larger firms, show that regulators may not shy away from publicity, even if their case may be legally solid.
Linking Mr Sarao to the flash crash "smacks of sensationalism", said Manoj Narang, founder of Tradeworx, a firm that supplies data for regulators. "Maybe they felt that would get the story in the papers. Mission accomplished, I guess."
In Britain, a petition has been started opposing Mr Sarao's extradition to the United States. So far, at least 194 people have signed up to an online message saying "One man with a single broadband connection cannot bring down an entire market".
Mr Sarao, who court documents show pushed around millions of dollars between banks in the Caribbean, Switzerland and the Middle East, has been granted bail in London on conditions including a 5 million-pound ($7.5 million) bond.
His lawyer, Joel Smith, declined to comment on whether Mr Sarao had yet raised the bail and been released, but said he opposes extradition to the United States.
'Cancel if close'
The view held by some in the market that Mr Sarao is a scapegoat for the flash crash may not help his case much.
The complaint from the Justice Department, and the civil charges from the market regulator, the US Commodity Futures Trading Commission, stop short of blaming Mr Sarao outright for causing the 2010 turmoil, instead referring to him as a "contributing" factor.
Moreover, the trading activity that the authorities say was illegal occurred on many days over a multi-year period, not just on May 6, 2010, when the flash crash happened.
That means that even without the flash crash, much of the substance of the complaint would still stand, experts said.
The software Mr Sarao allegedly used to execute his trades allowed him to position himself just above or under the market while being certain the bids will never be taken up.
He did this using so-called 'cancel if close' orders, which people in the market said can easily be suspect. It means that as the market price moved close to where Mr Sarao put in his orders, they would automatically be cancelled.
Michael Friedman, chief compliance officer at electronic trading firm Trillium in New York, said that market-makers, firms that smooth trading by guaranteeing prices, could legitimately do similar things.
But if people consistently cancel their orders, the case for manipulation can be made, he said.
"So was there a connection between what he did and the flash crash? There certainly isn't an obvious connection if there is one at all," Mr Friedman told Reuters.
Trillium itself was fined in 2010 for similar activity by the Financial Industry Regulatory Authority. Mr Friedman at the time was the firm's outside counsel; he said the firm "paid a fine and got rid of the offending traders".
Most of the modifications
In its complaint, the CFTC focuses on 12 days of Mr Sarao's trading. It shows that on those days, he accounted for more than 60 per cent of the order modifications in the E-mini contracts on the CME Group Inc futures exchange.
That was "more than one and a half times that of the rest of the market", the complaint says. But the documents also suggest that Mr Sarao may not have caused volatility himself, but only benefited from wild swings that already existed.
Mr Sarao "isn't a criminal", John Hempton of the Australian hedge fund Bronte Capital said on a blog post. "He is a hero. He is the sort of guy who makes the market safe for ordinary investors."
Mr Sarao's trading disrupts the trading of high frequency trading firms, which Mr Hempton referred to as "front running computers."
"The Department of Justice has been played into bringing the full force of the US legal system onto an irrelevant trader - just to make the world safer for the real rip-off merchants," Mr Hempton wrote on his blog.
Of the 12 days the CFTC looked at in great detail, Mr Sarao only executed trades on four. A Reuters analysis of those 12 days show those to be more volatile and with higher volume than on average in the April 2010 to August 2011 period, which encompasses all but one of the days the CFTC cited most closely.
For most of the period covered in the complaint, spoofing was not specifically banned.
That is why the authorities charged Mr Sarao with market manipulation, a wider concept, and harder to prove.
Some say spoofing shouldn't be illegal at all.
"If that's what Sarao did, he should be punished accordingly for breaking the rules," said Tradeworx's Mr Narang. "However, an entirely different question is whether this activity should be outlawed. I believe it should not be."
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