CHAPTER 8

CHAPTER 10

Interactive Session: Organizations: The Flash Crash: A New Culprit Case Study Questions: 1Identi!y the pro"le# and the control wea$nesses descri"ed in this case Experts initially attributed the crash to structural and organization organizational al features of the electronic trading systems that execute the majority of trades on the Dow and the rest of the world’s major stock exchanges. The huge wave of f lash crash sell orders intensified because of highspeed computerized trading programs. !ighfre"uency traders #!$Ts% have taken over many of the responsibili responsibilities ties once filled by stock exchange specialists specialists and market makers whose job was to provide the majority of stock market li"uidity. &ut many electronic systems' such as those !$Ts use' are automated' using algorithms to place their nearly instant trades. (n situations like the flash crash' when an algorithm is insufficien insufficientt to handle the complexity of the event in progress' electronic trading systems have the potential to make a bad situation much worse. $ive years later' another explanation emerged. ) single trader who operated out of his *est +ondon home was largely responsible for the event. ,n )pril -' -/0' the 1nited 2tates 3ustice Department had &ritish authorities arrest 45yearold 6avinder 2arao'charging 2arao'charging him with profiting from the flash f lash crash by boldly manipulating markets and using illegal trading strategies between -//7 and -/8.  -.%hat #anage#ent& organization& and technology !actors contri"uted to this  -.%hat pro"le#' To what e(tent was it a technology pro"le#' To what e(tent was it a #anage#ent and organizational pro"le#' )anage#ent 9 )de"uate controls were not in place to prevent traders like 2arao from )anage#ent9 manipulating the markets. :anagement is responsible for ensuring general controls like software' hardware' implementation' implementation' and administrative are in place and are ade"uate to prevent these kinds of situations. Organization9 +ong before the flash crash' the exchange had "uestioned 2arao about his Organization9 trading activity' but the exchange did not take any action against him' and 2arao continued his trading activities until a whistleblower brought forward new information. The organization should have fully investigated 2arao and taken appropriate action. Technology9 investigators overlooked evidence available Technology9 available hours after the flash crash thatcould have led them to 2arao. )t that time' investigators had access to the full set of data from the day of the flash crash but focused only on the data related to actual trades. (f they had included all bids and offers entered' they would have more likely noticed the pattern of 2arao’s market manipulation 4.To 4. To what e(tent was Sarao responsi"le' *(plain your answer The ;ommodity $utures Trading Trading ;ommission did not blame the crash solely on 2arao' but according to the ;ommission ;ommission’s ’s director of enforcemen enforcement' t' )itan