Last week regulators made an astounding charge. The claim? That an obscure British trader who lived with his parents near Heathrow airport "provoked" the flash crash of 2010. As a reminder, that was the unprecedented stock market drop in which the Dow Jones Industrial Average plummeted without apparent cause, down nearly 1,000 points at one point. The "flash crash" took place in minutes. Yet, for nearly five years we had been given an alternative narrative as to the cause.
This isn't the first time that we've uncovered London ties to market manipulation or concerns. In some ways, London is "ground zero" for financial terrorism. But, this news offered an interesting twist on what took place in 2010 as well as insight regarding 2008.
Of course, there is considerable debate as to whether this trader, using a technique known as "spoofing" could actually impact the stock market in that manner. There's no doubt he was doing something as he amassed $40 million in just a few years. He seemed aware that he was gaming the market and it was profitable. Some dispute that he could have had enough impact to wipe $1 trillion from stock values. Yet, for whatever reason, he was formally charged by the authorities.
Armchair-quarterback observers make their case that the authorities must be wrong. After all, it took them five years before they even made a case. And the explanation can't be so simple. How can they be certain he was involved? The debate is somewhat reminiscent of the argument regarding whether or not North Korea hacked Sony Pictures. The non-government experts point to all types of logic and theories to show that North Korea couldn't have done it. How, they ask, could the government be so certain? For their part, the FBI won't say how they know claiming the need to protect sensitive sources. The truth may be somewhat embarrassing. Perhaps the certainty comes from the fact that the NSA had hacked North Korea and thus watched them hack Sony. Isn't that an interesting thought?
Despite the hoopla and hype surrounding the "flash crash" charges, people seem to be missing the real point. And this point combines the awareness of the Sony Pictures hacking with the frightening considerations of stock market manipulation.
If a 36-year old trader living with his parents and wielding capital measured in the tens of millions could move the market that much and stay out of trouble for five years, what could a nation state or well-financed terror group accomplish? Add in the potential for computer hacking, which could literally manipulate the trading of every major high-frequency firm on the planet (witness the Goldman Sachs stolen algorithm case) and you have something really frightening. This is the subject of an important article by John Dyer at VICE News (excerpts below, read the whole article here).
April 22, 2015 | 2:34 pm
This week's arrest of a British financier accused of crashing the Dow in 2010 is now raising questions about whether terrorists could wreck havoc on the global financial system using computerized, high-speed trading.
At the behest of American officials, British police on Tuesday arrested Navinder Singh Sarao, 36, on 22 charges of fraud, market manipulation, and other crimes related to using algorithms and automated trading to trigger the 2010 "flash crash" — a bizarre event where the Dow suddenly plunged 600 points in five minutes without explanation, wiping out $1 trillion in shareholder value before markets rebounded on the same day . . . .
Meanwhile, security experts wondered if terrorists could take high frequency trading one step further, and cause a full-blown financial panic.
"It's extremely easy to cause that type of damage to a financial system, especially with technology nowadays," Alex Van Ness, a cyber terrorism analyst at the Center for Security Policy, told VICE News. "We are not really prepared for this. It doesn't take anything more than a home computer to be able to launch these type of threats."
Sarao allegedly upset the global economy from his parents' duplex in the west London neighborhood of Hounslow. He's accused of amassing $40 million from "spoofing," or illegally canceling trades before they were executed, with the intent to suppress prices so he could buy assets for a song.
Sarao is now fighting extradition in London, and his bail was set at £5 million. If convicted, he faces a possible 380-year jail sentence. A full extradition heading is set for August.
The news of his arrest is arguably a huge embarrassment for US regulators. Five months after the flash crash, the CFTC said that a Kansas investment firm sparked the crisis with a single $4.1 billion high-speed trade. The CFTC said the trade was legal, but faster and larger than the financial system had handled in the past.
Now the authorities blame Sarao — which is leading many to wonder if regulators are missing anything else.
"This is now five years ago," investment consultant Kevin Freeman told VICE News. "You could get away with it and do it every few months, and it would be five years before anyone tracked you down."
Freeman has argued that foreign powers tried to worsen the 2008 financial crisis — a notion former treasury secretary Hank Paulson corroborated recently with the BBC, revealing that Russia contacted China to conspire to tank the US market by selling Fannie Mae and Freddie Mac securities as they destabilized.
Freeman noted that Sarao probably wasn't seeking to spark a crash, and didn't have the deep pockets to make the magnitude of trades necessary to force a financial catastrophe.
Instead, Freeman said the British trader likely screwed up while thinking he was making lots of money legally. Sarao reportedly created a new company on the Caribbean island of Nevis called "Nav Sarao Milking Markets" and told regulators to "kiss my ass" — small time behavior that doesn't smack of shadowy conspiracy.
Though countries like China and Russia have the money and technological know-how to produce a financial panic, they have little to gain from doing so, Freeman added. He worried about other rich and tech-savvy enemies taking a cue from Sarao.
"A terrorist with nation-state capabilities could absolutely crash our stock markets," Freeman said. "They would force multiply what the one trader did. If a 36-year-old in his basement can do it, what can ISIS do with the $ 1 billion war chest they've amassed?"
We have been warning about the potential for stock market manipulation as a financial WMD for some time. We have demonstrated that financial weapons were involved in the 2008 market collapse. Unlike 2010, where the market rapidly recovered, the 2008 crash and its effects linger today. This collapse triggered events that nearly took down everything according to Representative Paul Kanjorski, then Chairman of the Capital Markets Subcommittee of the U.S. House of Representatives.
When you consider that the Syrian Electronic Army tapped into this power with a $200 billion impact in 2013 by simply hacking a Twitter feed, you can see the reason for concern. The idea that you can ruin an economy and make a huge profit in the process explains just how attractive this weapon can be.
Unfortunately, the "flash crash" case also demonstrates just how far behind the existing regulators are in this area. It is almost a "pre-9/11" mentality. Before the horrendous attacks of 9/11, the protocol was to talk hijackers into landing the airplane. The assumption was that you could catch them later. Similarly, in the financial markets, regulators monitor trading activity. After the fact, they then sort through and identify probable wrongdoing and make a case. This takes time. In the case of the "flash crash," it almost took five years and even still there are doubts. The assumption is, however, that we can catch the perpetrators and take back what they stole through fines while applying serious punishment in the form of prison terms. That was the methodology with Bernie Madoff even though not quite all the money was recoverable in his case. But, what if the hijackers have no intention of landing the airplane?
We have learned that our only means of stopping hijacker terrorism is to prevent it. Likewise, if market manipulators are not intent on amassing a multi-million dollar fortune and otherwise living peaceably, how will our current "catch them after the fact" protocol have success? What happens if the perpetrators live in a country without extradition agreements? Or, if they are state sponsored? Or if they don't care as much about making money as they do harming America?
Our conclusion is therefore a simple one. If the "flash crash" charges are valid, the markets can be manipulated rather easily and such manipulation can go undetected. That means we have bigger troubles indeed.
So what can be done? First, you should study the risks and develop a personal Game Plan. This can be accomplished by studying the book Game Plan; How to Protect Yourself from the Coming Cyber-Economic Attack.
Use the reports as a wake up call to get your financial advisor to learn more about such manipulations and to take measures to protect your portfolio. We have started a new non-profit effort to train financial advisors about the risks of global economic warfare and how to combat them. Learn more at NSIC.org.
In addition, you should insist that your Representatives and Senators awaken to the reality of this threat. Send them a copy of the first book, Secret Weapon; How Economic Terrorism took Down the U.S. Stock Market and Why it Can Happen Again, to identify how this has already happened and the serious threat posed for the future. Then, contact someone in their office and request that they meet with me on this very significant topic. I've met with dozens of American leaders and we have gained some traction. But we need your help to really get the momentum necessary to address this serious threat.
Perhaps the most important response, and the only one that really matters is that we remember what is really important. The reason that money is such a powerful weapon is that we as a people have elevated it to our reason for being. It wasn't always this way. Our nation has often sacrificed money and so much more for the principles of truth and justice. Yet, we have lost our way. Money has become our god and ultimate aim. This requires repentance. We cannot serve both God and Mammon. God is real and He has a much better plan for us.