In case you missed him in the news…
Navinder Singh Sarao, an otherwise unassuming 36 year old trader operating from his parent’s house in the London suburbs, was scooped up and arrested last week.
He’s currently fighting extradition to the US on charges of single-handedly causing the 2010 ‘flash crash’ in the US equities markets, which wiped £570 billion from the value of US companies inside five minutes.
If charged and found guilty on each of the 25 charges brought against him, he could face prison sentences totalling 380 years!
Now, by all accounts, he IS a bit of a whizzkid…
One of his former colleagues described him as a ‘super-human trader’. He went on to say how everyone was in awe of his ability to make money and that when he left Futex (the firm he was trained by) Sarao took £2.5 million with him in his trading account.
But is he only ‘guilty’ of beating the sharks at their own game?
It is claimed he has multiple millions of pounds tucked away in offshore accounts. But he surely seems small fry compared to the institutional behemoths of High Frequency Trading (HFT) that Michael Lewis spills the beans on in his book Flash Boys.
In fact, rumours are circulating the only ‘crime’ Sarao was guilty of is figuring out how to beat the sharks at their own game.
So could it be true it was the institutions themselves who ordered him to be taken down a peg or two? A sacrificial lamb that could divert attention from themselves when it comes to accusations of blatant market manipulation, as well as being a thorn in their side that they would prefer to have removed?
There are also tales of seven-figure ‘whistleblower fees’ being paid to those providing information to the financial authorities leading to the successful arrest of financial market ‘wrong-doers’. Could that be an irresistible incentive for someone to shop this sitting duck – a lone-wolf trader without political clout?
The thing that bothers me about all this is that Sarao appears to be a genuine outsider. Someone who figured out how to profit from incredibly fast micro-movements in the markets without being part of the back-scratching all-for-one-and-one-for-all corruption and malpractice boys club that we hear tantalising tales of.
Charge Sarao and they’d HAVE to probe elsewhere too, wouldn’t they?
We’ve heard some pretty shocking stuff in recent times: manipulation and price fixing in precious metals, interest rate and currency markets. The HSBC money laundering scandal. Multi-billion dollar ‘rogue-trader’ losses. I could go on and on…
But I still believe we’ll only ever scratch the surface of what REALLY happens behind the scenes. We only get to hear about the things these people get caught doing. Imagine how much goes by undetected?
So if they throw the book at Sarao, I guess it sets precedent. Will the authorities will be prying and poking into the trading rooms of investment banks and politically connected hedge funds worldwide? Picking up on the footprint of every ‘spoof’ order left behind in plain sight on the tape?
Some chance! I’m not going to hold my breath.
I dare say if the same rules and regulations were applied equally across the board, many institutional trading floors would sit silent and empty, their traders sitting in the slammer alongside Sarao.
But how exactly did he make all this money from his trades? How did he compete with the big boys with their microwave towers and direct-to-the-exchange fibre optic cables – all from his mum’s back room in Hounslow?
I’ve just been reading an email he sent to Financial Conduct Authority here in the UK last May. It’s been released as part of a court filing by the CFTC (Commodity Futures Trading Commission) over in the good old US of A.
It makes for some fascinating reading, so I thought I’d share some of the juicy bits of this story that caught my eye.
Why Hounslow trumps the City for trading speed
Sarao apparently had a reputation for being down to earth (and even a bit stingy!). No flash cars for him – he rode around on a fold-up bike, apparently. But not only did trading from his parent’s house save him paying desk fees – it may actually have been a key strategic move…
You see, one of the data servers for the Chicago Mercantile Exchange is located in Slough. And the nearer you are to the server, the quicker your order hits the market.
It means he was in a position to get his orders queued ahead of City-based traders, even if they hit the button at exactly the same point in time as him.
He claims to be an ‘old school point-and-click trader’
A key part of the allegations against him are that Sarao used computer programmes (algorithms) to place fake orders in the eMini S&P futures market. So called ‘spoof’ orders aim to manipulate market prices up or down by showing an apparent but fictitious demand or supply for the underlying asset.
Other trader’s algorithms running ‘phantom order’ strategies are affected too and the whole thing can snowball into a disaster very quickly indeed.
Sarao claims not to be a High Frequency guy. He says he doesn’t like the HFT arena and calls for it to be banned. He says he would like to see the maximum ‘clip’ size of orders raised from 2000 contracts to 5000, because it would make the spoofers think twice about their orders actually getting hit. And it would appear he actually asked the CME to introduce such a policy, but it was rejected by mysterious ‘other parties’.
No, Sarao says he is an old school point-and-click trader. Admittedly, one that can click mouse buttons very quickly indeed – accounting for between 4% and 7% of the entire eMini S&P market’s daily volume along the way – but he says his orders were always genuine and 100% ‘at risk’.
His ‘elephant in the room’ size drove him to hide his orders
This may well prove to be a key part of the case against him…
Sarao had custom computer software designed to help him hide his orders, because he felt ‘insiders’ knew where his orders sat and manipulated the market against him. He felt he was too conspicuous because of the large volumes he was trading. If his software did what he claimed, it was designed to help him get into and out of his trades more effectively, not manipulate the market with fake orders he actually had no intention of trading.
So it seems he did use computer technology to get his orders in and out of the book. I guess it all comes down to the strength of evidence against him now. Will they prove what he was doing broke the rules? They’re going to have a damn good go.
I’m not defending whatever Sarao got up to – there may well be a case to answer. But these institutions do have a habit of pointing the finger at easy targets over their own failings… and a lone-wolf operator from a foreign land fits the bill quite nicely here, thank you!
You can read the full email Sarao sent to the FCA about his trading methods here.
Could you beat the Hound of Hounslow to the market?
Test your trading reaction time with the Human Benchmark test.
See how quickly you can react to a box that changes colour on your screen by clicking your mouse. Then take your average speed result and post it on the TN Facebook page here.
Special mentions to anyone who can score sub-200ms! I’m currently off the pace at 263ms
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 29th April:
Friday 1st May:
Monday 4th May:
Tuesday 5th May:
I hope you enjoyed our look behind the scenes at Sarao’s trading operations today. Don’t forget to test your speed-trading reactions and let me know what score you get on the Facebook page here.
Until next time…