The thirtysomething trader facing a 380-year jail sentence

The man accused of masterminding the 2010 crash has little in common with the ‘flash boys’ of Wall Street fame

Clad in a cheap, unbranded grey sweatshirt and matching tracksuit bottoms, Navinder Singh Sarao sat in silence in the dock of court number five at Westminster magistrates' court.

But at the end of the hearing, the 36-year-old British futures trader stood with arms outstretched and shouted through the glass: “I’ve not done anything wrong apart from being good at my job. How is this allowed to go on, man? I’ve done nothing wrong!”

Now, more than three months after the hearing, Sarao has been released from prison after a judge agreed on Friday to reduce his bail from £5 million to £50,000. But to his US prosecutors, he remains a persistent and aggressive manipulator of the country’s biggest futures market, and someone who played a critical role in one of the most spectacular moves ever seen in its equity markets.

On May 6th, 2010, within five minutes, US equity markets spun out of control, collapsing by as much as 6 per cent before bouncing back to a recovery. This unprecedented event highlighted the technological changes that ushered in a new era of lightning-quick automated trading.

US authorities allege Sarao’s actions that day netted him $879,018, just one example of criminal behaviour that lasted more than five years, during which he made profits of $40 million. They seek to extradite him on 22 charges, ranging from wire fraud to commodities manipulation. If convicted, he could face a 380-year jail sentence.

What is clear is that Sarao was a gifted trader, not only aware of his talent but also some of the industry’s more professional arts such as “spoofing”: a bluffing ruse whereby traders try to profit from manipulating an asset’s price by entering and then cancelling dozens of fake orders.

But could one man, trading from his suburban west London home, single-handedly make trillions of dollars temporarily vanish from US markets?

The idea that Sarao caused the flash crash is "ridiculous", says Ben Rose, a criminal defence lawyer at Hickman Rose in London. "It makes a great headline to claim that Navinder Sarao caused the flash crash, but the evidence seeping out in the United States suggests otherwise. Both the timing of the trades – which stopped before the crash took place – and the amounts involved do not tie up very well."

Sarao, who was unable to meet the original £5 million bail because of a global freezing order on his assets imposed by US authorities, remained in custody, in a shared 4m by 3m cell at London’s overcrowded Wandsworth Prison, for 115 days until August 14th, when a magistrate agreed to the bail reduction.

‘Flash boys’

On the face of it, Sarao has few things in common with the “flash boys” of modern trading, the term coined by US author

Michael Lewis

to describe a new breed of traders who use cutting-edge technology for tiny advantages.

Born in the west London suburb of Hounslow, he is one of three sons and lived with his parents in a three-bedroom semidetached house in a close-knit, working class community of Indian and Bangladeshi immigrants. The house is so close to Heathrow airport that planes coming in to land cast shadows over the rooftops and block out the sound of conversations.

Unlike typical City traders, he eschewed sports cars and was not known to splash his cash. Most of his business correspondence was via a free MSN Hotmail account. “He drives that broken-down green car; it belongs to his parents,” says a resident who lives next door to Sarao’s brother.

Even so, there were limits to the modesty. Shortly after his 29th birthday, in 2007, he emailed the publisher of Trader Monthly, a now defunct magazine, pitching himself as a candidate for its "30 under 30" list of traders, according to court exhibits.

However, if Sarao is the criminal mastermind the US authorities seek to depict, former colleagues struggle to match the characterisation with the man they knew. After graduating from Brunel University in 2003 with a degree in computer science, he joined the trainee trader programme at Futex, a small trading house in Woking, Surrey.

Before long he had developed a reputation among his colleagues as a brilliant but reclusive trader. He mainly traded e-mini S&P futures, derivatives contracts based on the S&P 500 index of US shares. Traders put up a fraction of the value of the contract, but can profit greatly from the leverage it provides.

A self-described insomniac, he often slept from about 4am to noon, in time to prepare for US trading, and preferred to trade only on days where the markets were the most volatile. Colleagues say he would wear headphones to block out the noise of the trading floor, dress casually, and regularly drink pints of milk, not caring if it dribbled down his chin and on to his clothes. He often arrived late to avoid the peak-time train fare and rarely moved away from his desk to eat.

"There was no one trading like Nav," says Leif Cid, a former colleague. "He'd trade 1,000, 1,500 contracts at a time. All that stuff about turning up after 10am to save money is true; he'd wear the same jumper and tracksuit bottoms. His eyes were dark, he looked tired, but he was always polite and pleasant."

'The Matrix' He had also developed a reputation for trading big. "He could read a screen like the guy from The Matrix could," says a technology salesman who watched him trade, referring to the Hollywood film. "He once traded 5,000 lots while he was speaking to me."

It was at Futex that he made his first £1 million trade. “You needed permission from the company to stay [in a] long [trading position] overnight,” says Cid. “He’d got it and the market gapped in his favour. Everyone wanted to know how much he’d made. There was no high fives like in the movies, but he was proud of that.”

While he may not have surrounded himself with the accoutrements of wealth, Sarao was, by all accounts, raking in the cash. "If I trade well on a volatile day, I normally make circa $133,000. On quieter days I look to make between $45,000 and $70,000," he wrote in an email to the UK's Financial Conduct Authority on November 29th, 2007. But he was becoming dissatisfied, increasingly rankled by his compensation at Futex, which split revenues with some of its junior traders 50-50, or as much as 90-10 for their superstars. Sarao wanted to keep it all.

In late 2008 he left to join CFT Financials, a City-based proprietary trader. Purchasing a seat on the Chicago Mercantile Exchange, the world's largest futures exchange, gave him discounts for trading in bulk.

Not long after, the CME started to notice Sarao had his own unusual trading patterns, where he would pump large volumes of orders into the exchange’s flagship e-mini market, only to quickly cancel them. It began sending Sarao compliance warnings, all of which he routinely challenged.

It was not until a year later that the CME sent a warning to Sarao's broker, MF Global, over the high number of trades he was cancelling. He apologised, claiming he "was just showing a friend of mine what occurs on the bid side of the market almost 24 hours a day, by the high-frequency data geeks".

As recently as May 2014 he called himself an “old-school point-and-click” trader. “To this day, I am still using my mouse to trade,” he wrote in correspondence with the City watchdog.

But the prosecution alleges that, from June 2009, he was asking a consultancy, Edge Financial Technologies, to modify a program to allow him to automate trading functions. Over the next year, outsized orders became the norm and compliance notifications continued. It all came together on May 6th, 2010.

Spoofing and layering : DoJ’s case relies on alleged exchange activity

Much of the US Department of Justice's case relies on one day in the life of Navinder Singh Sarao: May 6th, 2010. He saw the day as another volatile day: an opportunity to make money in much the same way he had in recent weeks. However, it began with a third warning from CME Group to him and his then broker, MF Global, about his trading behaviour. The world's largest futures exchange had again contacted him about placing then quickly cancelling orders – a practice known as spoofing.

Mr Sarao turned down an offer to speak to the exchange, and later that month bragged in an email to the broker he had called the CME back "and told em to kiss my ass". To underline their depiction of his confidence, US regulators say he established an entity only weeks beforehand in the Caribbean island of Nevis with the provocative title "Nav Sarao Milking Markets Ltd".

US authorities allege Mr Sarao used unlawful trading tactics that same day, beginning at about 9.20am Chicago time. The pattern of placing orders, modifying them, then cancelling them was another unlawful trading technique known as layering.

That gave the impression there was substantial supply in the market. Each time, he cashed in by buying contracts at the artificially low price and selling them when the market corrected itself. In that period, the price of e-mini S&P futures contracts fell 39 basis points in just six minutes, the Commodity Futures Trading Commission alleges.

In the two hours before the flash crash, he intensified his activity. In that period, he placed six e-mini orders, which were replaced or modified 19,000 times before he cancelled them without completing one trade. Those orders, worth up to $200 million, accounted for between 20 and 29 per cent of the entire sellside of the order book for e-mini contracts on CME, regulators allege. Altogether, he traded more than 62,000 e-mini contracts with a notional value of $3.5 billion.

Aitan Goelman, enforcement director for the Commodity Futures Trading Commission, calls Mr Sarao “a significant factor in the market imbalance” as his orders alone were almost equal to the amount of orders to buy on the CME’s order book.

By then, the scene was set. A poorly executed large order was offloaded into the e-mini futures market, which moves in lockstep with the underlying S&P 500, although the futures market usually moves a fraction of a second quicker. When the e-mini futures market collapsed, the equity markets followed. As the market plummeted in front of the world’s eyes, a five-second pause in the CME’s systems halted the slide and markets recovered.

– Copyright The Financial Times Limited 2015

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