The arrest of a little-known futures trader this week drew back the curtain on one of the pernicious-sounding practices that have been linked to the distortion of global financial markets.
In the criminal complaint filed against a British trader on Tuesday, prosecutors said that a trading strategy known as spoofing was used to manipulate prices and helped lead to the 2010 “flash crash,” in which the biggest markets in the United States were thrown into disarray in minutes.
The 1,000-point plunge in the Dow Jones industrial average on May 6, 2010, challenged investor confidence and raised questions about how carefully regulators were watching out for rogue trading.
Long before this week’s case, however, spoofing was one of the most contentious — and according to some analysts, most common — ways for some high-frequency trading firms to manipulate stock prices. Traders using the technique look to make money by buying and selling securities in seconds, sometimes milliseconds.
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