It took nearly five years… but the feds have now fingered a patsy for the “flash crash” of May 6, 2010.
Pardon us if we sound a little, umm, skeptical about the official story. Not that we have any better idea what happened that day than you do. But from day one, nothing about this episode has computed.
The day after it happened, we were told a trader at a major firm — perhaps Citi — mistyped a trade as “billions” rather than “millions.”
Thus did the Dow plunge 1,000 points before springing back 650. Procter & Gamble tumbled 37%. The accounting firm Accenture collapsed briefly from $40 to $0.01.
“All because ‘M’ is just a hair too close to ‘B’ on a standard American keyboard,” quipped our fearless leader Addison Wiggin.
Now we’re told it’s the fault of a 36-year-old man still living with his parents… but who’s savvy enough to control tax shelters in Nevis and Anguilla, the better to protect $40 million in profits.
“From a modest stucco house in suburban west London, where jetliners roar overhead on their approach to Heathrow Airport, a small-time trader was about to play a hand in one of the most harrowing moments in Wall Street history,” says a Bloomberg account.
Yesterday, Scotland Yard picked up Navinder Singh Sarao. He’s been charged in the United States with 21 criminal counts, including fraud and market manipulation.
Said a neighbor to the Financial Times, “He drives that broken down green car, it belongs to his parents… His mother works part time in a pharmacy and his father is retired. They’re quite tight [for money] I’d say.”
Nor do the charges themselves add up. Fraud? Unlike an offense like “insider trading,” fraud presumes the existence of a victim who lost money as a result of the fraudulent act. Nowhere in the Justice Department complaint is a victim identified.
Sarao is also charged with spoofing, described by Bloomberg as “an illegal practice that involves placing orders with the intent to cancel before they’re executed.”
That makes it sound like something unusual. In fact, these phony orders are pervasive at times. They take place in bursts of 25 milliseconds — 10 times faster than you can blink. During one week in October 2012, the market-data firm Nanex discovered a single computer program — placing and instantly canceling orders — made up 4% of all quote traffic in the U.S. stock market. Are we to believe Sarao alone pulled that off?
Perhaps Sarao’s real crime was to make $40 million outside the accepted channels dictated by Wall Street and the City of London.
“At the time of the flash crash,” says the Bloomberg story, “Sarao was renting space from a proprietary-trading firm and clearing his transactions through MF Global Holdings Ltd., the now-defunct firm headed by Jon Corzine, said a person with knowledge of the matter.”
Now there’s an interesting study in contrasts. We won’t rehash the Corzine story, seeing as we did so only yesterday. We’ll merely point out that unlike Sarao, Corzine had identifiable victims whose accounts were raided.
But Corzine is the former CEO of Goldman Sachs, a former governor New Jersey, a former U.S. senator. Thus he faces a mere civil rap from the Commodity Futures Trading Commission.
Sarao, on the other hand, was a nobody until yesterday. He’s looking at 25 years.
We see a similar study in contrasts outside the financial realm.
Tomorrow, retired four-star general and ex-CIA director David Petraeus will be sentenced in North Carolina for leaking classified U.S. secrets to his mistress, Paula Broadwell.
“The information came in the form of eight black books that contained everything from identities of covert officers to discussions with President Obama,” said a Daily Beast story last month.
He copped a plea to a simple misdemeanor. In all likelihood, he’ll get a year of probation. What’s more, Petraeus escaped charges of lying to the FBI — which he did when he denied handing over classified information to Broadwell. (Bonus points: The interview took place in his CIA office.)
Meanwhile, next month, a former undercover CIA officer named Jeffrey Sterling will be sentenced on nine felony counts, including espionage.
More than a decade ago, Sterling was disturbed by a CIA plot called Operation Merlin. The idea was to funnel bogus nuclear blueprints to Iran. It appears Sterling worried Merlin had the potential to backfire — potentially speeding up progress on Iran’s nuclear program.
Sterling tried to “go through channels” and took up the matter with two staffers on the Senate Intelligence Committee in 2003. But they blew him off, so he went to The New York Times.
The Department of Justice has recommended Sterling get a minimum of 19 years.
“The same DOJ that recommends Petraeus should go virtually unpunished for sharing far more sensitive information with Paula Broadwell says that Sterling should go to prison for decades to set an example,” writes civil liberties blogger Marcy Wheeler.
Said the DOJ’s sentencing recommendation: “…a substantial prison sentence in this case is necessary to promote respect for the law.” And: “Most importantly for sentencing-disparity purposes, the defendant exercised his right to a jury trial.”
Note well: Exercise your right to a jury trial, face a longer sentence.
Hmmm… We understand back in London, the accused flash crash culprit Navinder Singh Sarao is fighting extradition to the United States.
Judging by Sterling’s treatment, Sarao’s only making it harder on himself…
To the markets: Trading is volatile today, but the major indexes are going nowhere. The only meaningful movement is in the S&P 500, up about a quarter percent at 2,102.
Gold’s grip on $1,200 has slipped again; at last check, the bid was $1,189. Crude sits at $56.24.
The big economic number of the day is existing home sales. The March figure was the strongest in 18 months, says the National Association of Realtors.
Earnings at Coca-Cola beat analyst expectations, but McDonald’s delivered a miss.
“Let’s just say earnings season is not off to a rollicking start,” says Greg Guenthner of our trading desk.
True, nearly two-thirds of companies have beaten analyst estimates so far this quarter.
But the top line’s looking ugly. “Revenue estimates are way down,” says Greg as he chews on figures from Bespoke Investment Group. Only 44% of companies have delivered a “beat” on revenue.
“U.S. stocks may be paddling against the current for a bit,” Greg concludes. “But while crappy earnings hold stocks back stateside, they should put fresh winds in the sails of foreign stocks.”
The winds are shifting in the auto sector, says our Jonas Elmerraji.
“We’ve had some big tail winds in car stocks for the last several years,” he explains. “For instance, according to industry data firm IHS Automotive, the average car age in the U.S. is now 11.4 years. That’s the oldest it’s been since the firm started collecting that data back in 1995. At the same time, interest rates are hovering at all-time lows, making it cheaper than ever to borrow the money for a new car today.
“That’s not just the story here at home — in emerging markets, a growing middle class is upgrading their transportation to passenger cars. For instance, while there were only 27 million passenger cars in China back in 2003, that number had grown to 154 million by last November.”
But as Jonas said in our virtual pages late last year, domestic auto sales are set to slow dramatically. J.D. Power figures on only 1% growth this year.
Jonas’ readers booked 184% gains on an auto-related play in January. Meanwhile, they’re up 28% in four months on the slowing sales trend. Look here for access to all of Jonas’ favorite ideas right now.
Adventures in corporate rebranding: The broadcast arm of Gannett has a new name.
Here’s the essential background. Many old-media companies are splitting up these days, the ossifying newspaper operations separating from the still-profitable broadcast operations.
Thus is Gannett, publisher of USA Today and scads of crappy cookie-cutter local papers, spinning off its couple dozen TV stations into an outfit called… Tegna.
“Tegna is composed of the letters of Gannett,” said a corporate spokesman yesterday. “It is not quite a full anagram. But because Gannett has two n’s and two t’s, we eliminated one of each.”
The Twitterverse quickly weighed in…
Other people pointed out that Web searches for “Tegna” autocorrect to the name of a Japanese sex-toy company. Heh…
Credit where it’s due: The foregoing tweets were compiled by Scott Jones, proprietor of the broadcast-insider site FTVLive, and an acquaintance from your editor’s TV news days.
“In reference to the FDA v. Kind,” a reader circles back to a topic from last week, “the Kind organization apparently does not understand how to effectively run their business in a third-world country like the Amerikan Oligarchy 2015.
“Kind really should study the USSA pharmaceutical industry’s business model. I mean, any industry that can cause such a massive consumer demand for their FDA-approved toxic chemical medicines loaded with scores of debilitating side effects on all of the Amerikan lumpen-naifs while the FDA (Federal Death Administration) proudly gives their stamp of approval to these toxic meds and vaccines is apparently doing something right.
“What FDA employee ever got even a one-day suspension without pay for approving the fen-phen diet pills that caused an epidemic of health problems for Amerikans who naively thought that the FDA was looking out for their best interests?
“And like the pharmaceutical industry, it is also imperative for Kind to hire high-level career FDA employees in lucrative, but mostly do-nothing jobs when they retire so that they can ‘liaison’ with their former FDA colleagues, i.e., stop stupid FDA ‘nastygrams’ about ‘saturated fat’ nonsense before they ever get sent.
“Hiring retired FDA trough-feeders also sends a subtle message to the still-employed FDA bureaucrats: ‘Don’t mess with your potential plush retirement gigs,’ aka ‘Don’t bite the hand that may feed you in the near future.’
“Kind just isn’t using saturated fat to grease the right palms at the FDA. That’s the subliminal message of the FDA’s nastygram.”
The 5: Every now and then we wonder about Bill Gates.
In the ’90s, Microsoft had almost no lobbying presence in Washington. “Gates resisted the notion that a software company needed to hire a lot of lobbyists and lawyers,” recalled Michael Kinsley in the Los Angeles Times. “He didn’t want anything special from the government, except the freedom to build and sell software. If the government would leave him alone, he would leave the government alone.
“At first this was regarded (at least in Washington) as naive. Grown-up companies hire lobbyists. What’s this guy’s problem? Then it was regarded as foolish. This was not a game. There were big issues at stake. Next it came to be seen as arrogant: Who the hell does Microsoft think it is? Does it think it’s too good to do what every other company of its size in the world is doing?”
Then the Justice Department sued Microsoft and the firm wised up. “It moved its government affairs office out of distant Chevy Chase, Maryland, and into the downtown K Street corridor,” wrote Kinsley. “It bulked up on lawyers and hired the best-connected lobbyists.”
Today Gates peddles all manner of dubious world-improving schemes to keep bureaucrats occupied all over the planet — from farm programs in Africa to the Common Core curriculum here at home.
And he’s worth $79.2 billion, good enough to top the Forbes 400.
“Sorry my tone was a little lowbrow,” writes the reader who stood up for Greg Guenthner and Jonas Elmerraji yesterday.
“I shouldn’t email angry, but even in a calmer mood, I thought the comments directed at them on Monday were arrogant and uncalled for. They haven’t ever done anything but try to help people.
“I sense something deeper going on. Perhaps the reader who wrote in Monday has a history of sorts with them or fancies himself/herself more sophisticated. Heck, maybe it was Tim Geithner or… Christian Bale.”
The 5: Well, thanks for rising to the defense of our trading desk. You have a vivid imagination.
“And it’s ‘chart chimps,’ not ‘chart monkeys,'” Greg Guenthner reminded us yesterday. This sign is now posted outside the enclosed area where he and Jonas are stationed…
Best regards,
Dave Gonigam
The 5 Min. Forecast
