Why you should worry about another 'flash crash'

A British court is scheduled to review next month whether the trader U.S. officials say was behind the stock market “flash crash” five years ago will be extradited.

A judge in London is granting conditional bail to Navinder Singh Sarao, who American regulators charge used a trading technique called “spoofing” that led to wild swings in stock markets on the afternoon of May 6, 2010, including a 1000-point move on the Dow (^DJI). He’s alleged to have made what officials call "a significant amount of money" from the manipulation. Sarao’s lawyer calls his client a person of impeccable character and is fighting the effort to have him sent to the U.S. for trial.

But could one person considered little more than a day trader have such a monumental impact on the financial markets? Yahoo Finance Editor in Chief Andy Serwer says absolutely:

“The bottom line is, spoofing, and the ability of one individual to wreak this kind of havoc on the markets, is for real,” he argues. “And it is scary.”

Sarao is accused of using algorithms to make lightening-quick trades that turned the financial world on its head.

“The technology that people can now have at their fingertips is unbelievable, the algorithms they can create,” Serwer notes, “it’s way beyond our regulators’ capability to oversee and the ability of most of us to even understand and fathom.”

Monica Mehta, Managing Principal at Seventh Capital, also feels most people are powerless to keep up with those trying to beat the system.

“Things like this are scary,” she adds. “You can’t get your arms around it, even if you stay on top of the news, with folks like this with algorithms.”

Serwer points out this technology literally does “spoof” the markets into believing something that isn’t really happening.

“With this spoofing you actually put in trading orders you never intend to execute,” he explains. “And then you make another trade that bounces off the false intention that you’re putting out there.”

Mehta is just dumbfounded it’s taken five years for regulators to bring these charges.

“This helps me understand why when you look at broader economic data that consumers have a reluctance to participate in the markets,” she adds. “They see more confidence in real estate-- which actually contributed to the great recession-- than they do the stock market.”

Yahoo Finance’s Jen Rogers is also concerned about the long lag between what we thought we knew back in 2010…and now.

“They came out with a report a couple of months afterward. We had a whole theory on how this went down,” she notes. “It’s a little bit more unsettling how long it took them to come up with this and if one person could do this.”

Serwer agrees the regulators really dropped the ball.

“It’s not even you’re asleep at the switch,” he says. “You’re not even there.”