Reading through these it's fairly obvious that Sarao's layering was manipulative and illegal (it boggles the mind that they only caught up with him now), but blaming him for the flash crash is ridiculous over-reach.
Another factor to consider is Sarao's internet speed limitations. It seems that news outlets are reporting that Sarao "worked out of his house in London"... well I lived in that part of London and in 2012 it was hard enough getting anything near 60 Mb/s downstream, 10 Mb/s upstream and 15ms ping, so how the heck could he run a HFT operation?
Even if we consider the possibility of co-location it costs millions for this sort of access, and the capitalisation of his firm looks like it is sub £20mil between 2010 and 2011.
Well since we're talking about the e-minis lets assume the CME GLink... according to CME Group it would cost $12,000/mo with a one-time install of $2,000 and a minimum commitment period of 12 months. [Source: http://www.cmegroup.com/globex/files/connectivityoptions.pdf]
You then need the hardware and technical expertise to pull off the install... so lets say another $20,000 to $25,000 for hardware and I'd estimate $2,000 to $5,000 in technician charges.
So total outlay just to get the hardware set-up would be about $168k to $176k. Then there is the dev costs and I shudder to think about what is actually required here bearing in mind I think I do some pretty advanced retail trading in LISP.
Now, my point to all of this is when I step back for a moment and ask myself would someone outlay circa $150k on what is clearly a strategy that is blatant market manipulation, it defies belief that someone smart enough to pull it off would be dumb enough to try. I would even go further that this is especially true since there are many other opportunities to make honest money from the market trading legally.
If you read the actual complaints you will see it is explicitly outlined that he was using FCMs and was buying the trading platform. In fact one of the pieces of evidence that is mentioned are emails asking for feature requests from the software vendor.
Even if you grant the 150k capital outlay, the complaint alleges that this was a scheme worth 40 million dollars, a business opportunity many people would jump at. Further, the amount of orders he was placing would put a much higher capital constraint against his margin and clearing risk management than on the colocation.
My main point is that people act like getting colocation is the big barrier to entry for HFT and it simply isn't. Quite the opposite it is a business where most of the technology has been commoditized and the margins are razor thin. The barrier to entry is coming up with a trading strategy that works well on a risk adjusted basis, and spoofing may be one way to accomplish that.
Firms much larger than this one have been accused of similar behavior in the past.
http://online.wsj.com/public/resources/documents/SaraoDOJ04-... (DOJ complaint)
http://online.wsj.com/public/resources/documents/saraoCFTC04... (CFTC complaint)