FT-Sarao Crimminal Mastermind

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The pre-market email

August 17, 2015 2:27 pm

Philip Stafford, Lindsay Fortado and Jane Croft

Modest background of UK man facing US charges over ‘flash crash’

lad in a cheap, unbranded grey sweatshirt and matching tracksuit bottoms, NavinderSingh 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, with his shoulders raisedand arms outstretched, shouted through the glass as he was being led back down to the cells:“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 that hearing, Mr Sarao hasfinally been released from prison after a judge agreed on Fridayto reduce his bail from £5m to £50,000. But to his USprosecutors, he remains a persistent and aggressive manipulatorof the country’s biggest futures market, and someone who played

Navinder Singh Sarao: reclusive trader orcriminal mastermind?

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Navinder Singh Sarao: reclusive trader or criminal mastermind? - FT.com http://www.ft.com/intl/cms/s/0/efb897e6-40f7-11e5-9abe-5b335da3a9...

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a critical role in one of the most spectacular moves ever seen inits equity markets.

On May 6, 2010, in the course of five minutes, US equity marketsspun out of control, collapsing by as much as 6 per cent before

ricocheting to a recovery. This unprecedented event highlighted the technological changes thatushered in a new era of lightning-quick automated trading.

US authorities allege that Mr Sarao’s actions that day netted him $879,018 — just one exampleof criminal behaviour that lasted more than five years, during which he racked up profits of$40m. They are seeking to extradite him on 22 counts ranging from wire fraud to commoditiesmanipulation. If convicted, he could face 380 years in jail.

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

But could one man, trading from his suburban west London residence, single-handedly maketrillions of dollars temporarily vanish from US equity markets?

The idea that Mr Sarao caused the flash crash is “plainly ridiculous”, says Ben Rose, a criminaldefence lawyer at Hickman Rose in London. “It makes a great headline to claim that NavinderSarao caused the flash crash, but the evidence seeping out in the United States suggestsotherwise.

“Both the timing of the trades — which stopped before the crash took place — and the amountsinvolved do not tie up very well.”

Mr Sarao, who was unable to meet the original £5m bail because of a global freezing order onhis assets imposed by US authorities, remained in custody in a shared 4m by 3m cell inLondon’s overcrowded Wandsworth Prison for 115 days until August 14, when a magistrateagreed to the bail reduction.

On the face of it, Mr 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 usecutting-edge technology to gain tiny advantages over rivals.

Born in the west London suburb of Hounslow, he is one of three sons and lived with hisparents in a three-bedroom semi-detached house in a close-knit, working-class community ofIndian and Bangladeshi immigrants. The house is so close to Heathrow airport that planescoming 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 casharound. Most of his business correspondence was via a free MSN Hotmail account. “He drivesthat broken down green car, it belongs to his parents,” says a resident who lives next door to


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Mr Sarao’s brother.

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

However, if Mr Sarao is the criminal mastermind the US authorities are trying to depict,former colleagues struggle to match the characterisation with the man they knew. Aftergraduating from Brunel University in 2003 with a degree in computer science, he joined thetrainee trader programme at Futex, a small trading house in the commuter town of Woking inSurrey.

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

A self-described insomniac, he often slept from about 4am to noon, in time to prepare for UStrading, and preferred only to trade on days where the markets were the most volatile.

Colleagues say he would clamp on heavy-duty headphones to silence the noise of the tradingfloor, dress casually every day and regularly drink pints of milk, not caring if it dribbled downhis chin and on to his clothes while he worked. He often arrived late to avoid the peak-timetrain fare and rarely moved away from his desk to eat.

“There was no one trading like Nav,” recalls 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’dwear the same jumper and tracksuit bottoms. His eyes were dark, he looked tired, but he wasalways polite and pleasant.”

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

It was at Futex that he made his first £1m trade. “You needed permission from the company tostay [in a] long [trading position] overnight,” recalls Mr Cid. “He’d got it and the marketgapped in his favour. Everyone wanted to know how much he’d made. There was no high fiveslike in the movies, but he was proud of that.”

While he may not have surrounded himself with the accoutrements of wealth, Mr 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 anemail to the UK’s Financial Conduct Authority on November 29 2007. But he was becomingdissatisfied, increasingly rankled by his compensation at Futex, which split revenues with someof its junior traders 50-50, or as much as 90-10 for their superstars. Mr Sarao, however,wanted to keep it all.


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

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

It was not until a year later, that the CME sent a warning to Mr Sarao’s broker, MF Global, overthe high number of trades he was cancelling. He apologised, claiming he “was just showing afriend of mine what occurs on the bid side of the market almost 24 hours a day, by the highfrequency data geeks”.

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

But the prosecution alleges that, from June 2009, he was asking a consultancy, Edge FinancialTechnologies, to modify a program to allow him to automate some trading functions. Over thenext year, outsized orders became the norm and compliance notifications continued. It allcame together on the fateful day of May 6 2010.

Tomorrow: the case against Navinder Sarao


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FT-Sarao Crimminal Mastermind