Finance Professor Calls CFTC Allegations That Nav Sarao Caused Flash Crash "Outrageous"
Commentary by Steven Lofchie
In a Streetwise Professor blog post titled, "A Matter of Magnitudes: Making Matterhorn Out of a Molehill," University of Houston finance professor Craig Pirrong discussed the CFTC civil complaint in the Nav Sarao case, along with the affidavit by Cal-Berkeley's Terrence Hendershott.
According to Dr. Pirrong, instead of supporting the CFTC's claims that Sarao's actions had a large impact on contributing to the Flash Crash, Hendershott's report "undermines" the CFTC's claims. Rather, Hendershott's two analyses estimate small price impacts from Sarao's activity that are minuscule compared to the price effects that the CFTC asserts. Dr. Pirrong goes on to say that he is "deeply disturbed" by the complaint's and Hendershott's "sample days" concept which Dr. Pirrong likened to "cherry picking."
Furthermore, Dr. Pirrong pointed out that the DOJ, the CFTC, and Hendershott all state that Sarao turned the layering algorithm on and off, which caused prices to "rebound by approximately the same amount as turning it on caused prices to fall." Dr. Pirrong argued that this is "directly contrary" to the consistent insinuation that Sarao was driving down prices. Instead, Dr. Pirrong reasoned that Sarao caused price "oscillations." Additionally, Dr. Pirrong asserted that the CFTC complaint lacks "actual evidence" in the section labeled "Example of the Layering Algorithm Causing an Artificial Price" that contains no analysis of market price.
Dr. Pirrong contended that if the CFTC tries to prove that Sarao caused or even contributed to the recent "Flash Crash," "it will face huge obstacles." He explained that there were many actors in the markets on the day of the Flash Crash. Attributing the huge change in the system to the behavior of any one individual is "metaphysically impossible to prove" he stated. Dr. Pirrong acknowledged that Navinder Sarao's conduct was "dodgy" and noted there is "a colorable case" that he did engage in illegal spoofing and layering, but concluded that the CFTC's assertion as to the alleged impact of his conduct and the legal consequences that could arise from his prosecution are "outrageous."