Hounslow did not wreak was not origin of havoc in New York

Here is what we know about US equity markets. First, they are large — the S&P 500 alone has a capitalisation of $20tn. Second, they are — meant to be — extremely liquid. Billions of shares trade every day. The spread between the best bid and offer ought to be slender, and behind these prices will cluster a shoal of others that closely compete. The indices also support an array of futures contracts for those needing exposure to the broader market.

We also know that on May 6 2010 these markets, briefly, went berserk. Over the course of a few minutes, they wheeled and soared and swung, crashing 6 per cent before recovering. Household names like Procter & Gamble dipped by a quarter, the consultants Accenture at one point swapped hands for one cent. It was the purest example of market malfunction in recent times. Despite the brewing crisis in Greece, nothing fundamental happened to explain such a spasm — no rumour of war or assassination, not even a clumsy misstatement by a central bank.

Numerous, complementary theories explain how inexplicably low prices failed to attract the preponderance of buyers that would normally dampen such a move. A large sale of futures contracts hit an air-pocket of missing bids. Computer algorithms malfunctioned, selling rather than holding back as the price fell. “High frequency” traders withdrew their interest all at once. Everywhere illiquidity begat further illiquidity, spreading in a feedback loop between cash and futures markets.

From this week’s financial headlines there emerges a new perspective on the crash, originating from a semi-detached house in Hounslow, on the outskirts of London. Between 2009 and 2014, including on the day of the “flash crash”, a futures trader called Navinder Singh Sarao is alleged to have acted fraudulently in S&P 500 e-mini futures, manipulating prices rather than honestly trading them. He is accused of “spoofing”, which means to enter and rapidly retract orders to create the illusion of large buying or selling interest, to gull the market into moving the price one way or another. Those who want market information to reflect the true state of affairs have clear rules against such conduct.

But no one should suggest that Mr Sarao was solely responsible for triggering the crash. He is not a multibillion-dollar investor or bank able to shoulder trillions in exposure. The US investigation into the crash found that the trades most directly responsible probably amounted to several billion dollars’ worth of sales. Mr Sarao’s alleged phantom offers may have comprised a disproportionate chunk of that day’s implicit interest, but the whole point of the judicial complaint is that his orders were phantom. You cannot ‘spoof’ half a trillion dollars off the value of US equities. To accuse Mr Sarao of causing the crash is like blaming a flea on an elephant’s rump for a stampede.

As the joke goes, the normal way to make a small fortune from futures markets is to start with a large one. The manner in which Mr Sarao is accused of making his looks distasteful at the least and possibly criminal. Such characters often claim only to have profited from other traders like themselves, but these actions can undermine market integrity to the cost of all. It is up to the courts to determine the treatment it deserves. But the US authorities cannot seriously believe that a man armed with a few million dollars and a roomful of computers could make billions of dollars vanish from the US equity market. If, somehow, iffy behaviour by Mr Sarao sparked the explosion of May 6 2010, a better question is why the market so closely resembled a powder keg.