The U.S. government has recommended that the British man thought to be at least partially responsible for the 2010 Flash Crash, which saw the Dow Jones Industrial average lose and then mostly regain nearly 1,000 points within the course of only a few minutes, receive no additional jail time, citing his high level of cooperation with authorities as well as his autism diagnosis, according to Bloomberg. 

The trader, Navinder Singh Sarao, was believed by the U.S. Justice Department to have been a significant factor in the incident, which rattled Wall Street and highlighted the risks of rising automation in the financial sector. Sarao, essentially a day trader, is said to have used his own custom software to perform a type of market manipulation called "spoofing," whereby someone fills an order but then cancels it at the last minute to move the price (in this case by giving a false impression of higher supply, thus lowering prices.) Sarao's program, according to the Justice Department complaint, would move price offers up or down depending on the actions of other market participants, but always in a way that ensured those orders would never get filled and would later get cancelled, thus keeping his downward pressure on the market as a whole constant. The complaint said that the steady sell-side pressure Sarao had exerted on the E-Mini market began leaking into the equities market, which then sparked off the famous catastrophic decline. 

Sarao, who spent four months in a London jail over the incident, fought extradition to the United States but ultimately lost in 2016. He faced one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of “spoofing," and in November 2016 he pleaded guilty to wire fraud and spoofing.  Had he gone to trial and been found guilty of all charges, he could have faced a sentence of 350 years in prison, more than that of even notorious fraudster Bernie Madoff. While the government at first recommended a sentence of 78 to  97 months for the wire fraud and spoofing charges, it now believes Sarao should not serve any jail time at all. 

In a memo filed with the court on Jan. 14, the government said that Sarao has given "extraordinary cooperation" by helping authorities build cases against other market manipulators and educating them on how to spot others, particularly in the world of high-frequency trading. The government also said that he's already lost most of the money he made, having been repeatedly scammed in fraudulent investment schemes, and that even when he had his money, all he did was buy a cheap car. The government also brought up his autism diagnosis and noted that he lives with his parents in London in a bedroom that it described as childlike. Sarao is scheduled to be sentenced on Jan. 28.

While 2010 was the first flash crash, it was far from the last. The Securities and Exchange Commission (SEC) fined Merrill Lynch in 2016 over its poor internal controls causing a series of mini-flash crashes that created wild price swings between 2012 and 2014 (On two occasions, according to the SEC, 99 percent of a company's entire stock value was wiped due to the firm's activities.) And just to show that it's not only equities markets that can experience this phenomenon, last year saw the Japanese yen rise to dramatic highs and then crash back down to normal levels within the course of just seven minutes. 

Flash crashes are a result of the increasingly computerized nature of finance. High-frequency trading, whereby millions of trades are made per second according to an automated algorithm, now makes up 75 percent of all market volume, according to Fortune. An article in Law360 reported that 70 percent of all futures trading is done electronically as well. Even treasury bonds have become strongly linked with computerized trading; a joint report from the New York Federal Reserve, the Federal Reserve Board, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) found that, on a normal day, 50 percent of "total trading in both the cash and futures markets" in U.S. treasuries is done by firms that engage almost exclusively in high-frequency trading. 

Complications emerge, however, when these algorithms interact with each other in the open market. One algorithm might react to a piece of news, as in 2013, when a hoax reached Twitter saying the president was assassinated, and begin to sell; the other algorithms, seeing this, might react to their reaction and begin selling too, until eventually you have all the computers seeing that something terrible is happening and selling to protect themselves. This all happens within seconds, or sometimes even milliseconds. Then, once asset prices crash as a result, the computers spot a deal and begin frantically buying whatever it was they were, just a short while ago, frantically selling. The result is a massive dip, followed by a huge recovery that erases all or at least some of the damage done by the crash. 

Two years after the 2010 Flash Crash, the SEC voted to require that national securities exchanges and the Financial Industry Regulatory Authority (FINRA) establish a market-wide consolidated audit trail (CAT) that will allow regulators to track all activity in the U.S. equities and options market. The CAT database, once completed, will allow the SEC to track every transaction under its jurisdiction from start to finish and know who made it and who processed it, down to the millisecond. This would allow regulators to easily reconstruct market events and allow them to better spot market manipulation and better understand unusual freak events like the flash crash (which took almost five months for regulators to investigate as to its causes).

The SEC approved the plan submitted by FINRA and the national exchanges in 2016. Since then, however, it has been subject to repeated delays. Even before there was voting on the plan, it was the subject of heavy criticism, with the Securities Industry and Financial Markets Association complaining that the whole process has been dominated by self-regulatory organizations with little meaningful input from broker-dealers, who will nonetheless bear the program's costs. Another major point of contention was cybersecurity. Fidelity Investments, in its own comment letter, noted that the CAT Central Repository would process more than 58 billion records, representing 13 terabytes of data, daily, making it the largest, most comprehensive data repository for securities transactions to date. Some of this information, Fidelity noted, includes confidential and sensitive personal and proprietary trading information, which it said represents an attractive opportunity for potential misuse, such as identity theft. While it noted that the rule does include certain cybersecurity provisions, it lamented a lack of specifics. 

These cybersecurity concerns continued to dominate discourse around the CAT project. They were raised again when the exchanges missed the 2017 deadline to complete the project, with the exchanges saying they still needed more time to harden the system against hackers, frustrating SEC Chair Jay Clayton who urged them to complete it. While there has been some progress, as Clayton reported that at least some data is now being sent and final reporting specifications have been released, implementation has recently hit another snag, as firms have balked at the contract they must sign to be connected to the system. The Wall Street Journal reported that brokerage firms such as Credit Suisse, Morgan Stanley and UBS have raised concerns over a clause that holds them legally liable should the database be breached, which would greatly increase their legal exposure in such an event. Another eyebrow-raising clause limits the liability of the group overseeing the CAT database (a consortium of major stock exchanges plus FINRA) to $500 to any broker making a claim against it. The Journal said this has made brokerages hesitant to sign up: of the 1,300 that will be required to do so by the April 20 deadline, only about half have already done so.