Regulators don’t like being embarrassed and the Flash Crash was an embarrassing episode for the people who are in charge of supervising financial markets. From a regulatory perspective, the problem with financial markets is that they are by their very nature distributed amongst many participants, and therefore it is very difficult to assign blame when something goes wrong. When you can’t assign blame to a single entity you have to do messy, complicated things like make changes to market structure or, perhaps even worse, admit that you are powerless to stop things like the Flash Crash from happening. Luckily for regulators, after five years of searching they have found a 30 something year old London day-trader to pin the blame on.
As far as I know, nobody can say for certain what caused the flash crash. But from what I’ve read it was probably a combination of a large futures order and high frequency trading firms exiting the market due to the strong downward bias that, that order caused. What’s important for the purposes of interpreting recent headlines is that it is very unlikely that it had anything to do with this single guy who got arrested in London. I say this for two reasons;
1) The accused was not doing the accused spoofing at the time of the actual flash crash but rather leading up to it, and he did it for multiple days before and after with no additional flash crashes.
2) The accused was only targeted by authorities after a tip from a Whistleblower from within the high frequency trading industry, an industry that is hurt by his practice of spoofing.
Matt Levine and John Hempton have very good write-ups for those who want to delve further into this:FULL POST