LONDON — A futures trader was arrested in Britain over allegations that his manipulation of trades helped prompt the May 2010 "flash crash," when the Dow Jones industrial average plummeted 600 points and unnerved many investors, even though stocks quickly recovered their losses.
The trader, Navinder Singh Sarao, 37, was arrested Tuesday morning at his home in London on wire fraud, commodities fraud and manipulation charges, prosecutors in the United States said during a news conference.
The flash crash prompted widespread concern about the role of high-frequency trading and its impact on wider market stability.
According to the complaint, which was unsealed on Tuesday, Mr. Sarao is accused of using an automated trading program to manipulate the market for E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange. E-minis are stock market index futures contracts based on the Standard & Poor's 500-stock index.
Prosecutors said that Mr. Sarao's actions earned him significant profits and contributed to the precipitous drop in the market. From April 2010 to present, Mr. Sarao and his firm, Nav Sarao Futures Limited, have made a profit of more than $ 40 million from S.&P. E-mini trading, regulators say. About $ 7 million of his assets have been frozen.
"We believe that we can show that he was a significant factor in the market imbalance and the market imbalance was one of the chief conditions" of the flash crash, Aitan Goelman, director of enforcement at the Commodity Futures Trading Commission, told reporters in a conference call. The C.F.T.C. said it believed that his misconduct continued even into this year.
Mr. Goelman said that Mr. Sarao used both software tools and manual trading to manipulate the price of the S.&P. E-mini, using off-the-shelf software that he modified. He used the scheme on more than 400 trading days from 2010 to 2014, regulators said.
The C.F.T.C. has filed a parallel civil action against Mr. Sarao.
The United States is requesting his extradition. Calls to Britain's Serious Fraud Office, Financial Conduct Authority and Scotland Yard were not returned.
"Just because you are outside the U.S. borders does not mean you are safe from apprehension," Mr. Goelman said. "This case is an example of our renewed focus of working with criminal authorities."
The arrest casts a harsh light on the original explanation for the crash, which appears to have been completely wrong.
After the flash crash, the Securities and Exchange Commission and the Commodity Futures Trading Commission produced a report that laid the blame on one trade from Waddell & Reed, a brokerage firm based in Kansas City, Mo. A Dutch academic later challenged that view, saying the answer was more complex.
The S.E.C. and C.F.T.C. are likely to come under harsh criticism for their initial report. Mr. Goelman defended it, saying it was "based on the best information at the time."
Mr. Goelman said that the 2010 report flagged the E-mini contract as a culprit, but said that an investigation eventually revealed that it was manipulation, or "spoofing," in the instrument that contributed to the crash.
Mr. Sarao was charged in a federal criminal complaint in the Northern District of Illinois on Feb. 11 with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation and one count of "spoofing," a practice of bidding or offering with the intent to cancel the bid or offer before execution.
Mr. Goelman said that regulators were not pinning the blame on the crash solely on Mr. Sarao.
"I'm not ready to go that far," he said. But he added that Mr. Sarao's actions played a noticeable role in the problems.
"His conduct was significantly responsible for the order unbalance, which was one of the conditions that led" to the crash, Mr. Goelman said on the call with journalists.
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