Nick Baumann

Nick Baumann

Senior Editor

Nick is based in our DC bureau, where he covers national politics and civil liberties issues. Nick has also written for The Economist, The Atlantic, the Washington Monthly, and Commonweal. Email tips and insights to nbaumann [at] motherjones [dot] com. You can also follow him on Facebook.

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The Feds Say One Schmuck Trading From His Parents' House Caused a Market Crash. Here's the Problem.

| Thu Apr. 23, 2015 7:17 PM EDT

On Tuesday, the Justice Department and the Commodity Futures Trading Commission, a key Wall Street regulator, blasted out press releases declaring a great victory in their war on illegal manipulation of financial markets. The reason for the feds' braggadocio? They think they've caught the guy who caused May 2010's "flash crash," a market seizure that vaporized a trillion dollars in shareholder value in a matter of minutes.

Federal regulators say that Navinder Singh Sarao, a 36-year-old British futures trader whose company was reportedly based in his parents' home, illegally placed huge sell orders he never intended to complete, artificially driving down the price of a key futures contract so he could later swoop in to buy it cheaply. (This is called "spoofing" in financial jargon.) There's one big problem, though: By charging Sarao with "contributing to the market conditions that caused" the flash crash, federal regulators are changing their story about what really happened to financial markets five years ago.

Here's the background. In the days and weeks after the flash crash, the Securities and Exchange Commission, alongside other regulators, worked diligently to figure out what had happened. The flash crash was chaos: Liquidity evaporated, the same stocks traded at both a penny and at $100,000, and CNBC hosts freaked out even more than usual. (Prices eventually returned to normal, and the SEC canceled some of the weirdest trades.)

The flash crash was essentially over in five minutes. But it took regulators nearly five months to come up with a theory about what happened. And in late September 2010, when the SEC and the CFTC—the same agency now charging Sarao with causing the crash—released a joint report on what happened, they didn't mention spoofing, let alone Sarao. Instead, they blamed a large trade by a firm out of Kansas City.

It's not even clear that the feds' new explanation is correct. As Matt Levine notes over at Bloomberg View, regulators believe that Sarao continued to place massive fake sell orders in the years after the flash crash, but somehow that activity never triggered another crisis:

If regulators think that Sarao's behavior on May 6, 2010, caused the flash crash, and if they think he continued that behavior for much of the subsequent five years, and if that behavior was screamingly obvious, maybe they should have stopped him a little earlier?

Also, I mean, if his behavior on May 6, 2010, caused the flash crash, and if he continued it for much of the subsequent five years, why didn't he cause, you know, a dozen flash crashes? 

So I mean…maybe he didn't cause the flash crash?

But in some ways, it doesn't particularly matter whether regulators' new theory is correct. What matters is that it took so long for them to develop it.

As I reported in January 2013, today's financial markets move so fast that regulators can't even monitor them in real time, let alone intervene if something starts to go wrong. Sophisticated trading algorithms can buy and sell financial products faster than you can blink—all without human intervention, let alone real-time human judgment. When something does go wrong, it can take months or years to figure out what happened. "A robust and defensible analysis of even a small portion of the trading day can itself take many days," Gregg Berman, who wrote the 2010 SEC/CFTC report, told me in 2013.

Since real-time intervention by human regulators is impossible, regulators have to rely on automatic measures—fail-safes that stop trading if prices rise or fall too fast, for example. But these sorts of automatic braking systems are, by definition, designed in response to the previous crisis. "We're always fighting the last fire," Dave Lauer, a market technology expert who has worked for high-speed trading firms, said in 2013. As I wrote then:

Years of mistakes and bad decisions led to the 2008 collapse. But when the next crisis happens, it may not develop over months, weeks, or even days. It could take seconds.

More here.

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The American Teen Whose Death-by-Drone Obama Won't Explain

| Thu Apr. 23, 2015 11:15 AM EDT

On Thursday, President Barack Obama appeared in the White House press room to reveal that a US strike in January on an Al Qaeda compound had killed two hostages held by the terrorist group, Giovanni Lo Porto, an Italian, and Warren Weinstein, an American. He offered his condolences to their families for the mistake that led to their deaths.

It's remarkable that Obama spoke of this at all. The US targeted killing program is shrouded in secrecy, and the president had never before issued a statement like this about people accidentally killed by US drone strikes. (He did not use the word "drone.") One such death that stands out is that of Abdulrahman al-Awlaki, a 16-year-old American citizen who was killed in a US drone strike.

Abdulrahman was the son of Anwar al-Awlaki, the radical cleric turned Al Qaeda propagandist. The father was killed in a drone strike that targeted him in Yemen in September 2011. The son was killed weeks later in a separate strike in Yemen. According to his family, the attack was on a restaurant. Attorney General Eric Holder later said that this strike did not "specifically" target the young man.

The US government has never said that Abdulrahman was involved in terrorist activities. In 2012, I asked Obama during a Reddit AMA what he thought about the teen's death, and the question received hundreds of votes from Redditors, meaning the president and/or his social-media team almost certainly noticed it. Yet Obama didn't respond.

Now that he's established the precedent of explaining the killings of US citizens in targeted strikes, Obama and the administration might see fit to say what happened in the case of Abdulrahman. Was his death accidental or is there evidence he was involved with terrorists?

For more on Abdulrahman al-Awlaki, read Tom Junod's 2012 piece on his killing.

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