UK trader arrested over 2010 flash crash

A UK futures trader operating out of a suburban house under the approach path to Heathrow airport is due in a London court on Tuesday after being charged by US authorities for allegedly contributing to the 2010 "flash crash", which saw the Dow Jones Industrial Average plunge more than 600 points in a matter of minutes.

Navinder Singh Sarao, 37, of Hounslow, was arrested in Britain, and US authorities are seeking to extradite him to stand trial in Illinois.

He was charged with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation and one count of spoofing, a form of market manipulation which involves putting on an order and swiftly withdrawing it before a trade can take place.

Mr Sarao, who could not immediately be reached for comment, is due to answer the charges at Westminster magistrates' court in central London on Tuesday morning.

The Department of Justice estimates that he made about $40m in total between 2010 and 2014 trading in S&P 500 futures contracts.

The flash crash of May 6 2010 led to shares in well-known companies such as General Electric and Accenture trading at just one cent during the mayhem, and thousands of trades were subsequently cancelled.

The chaos across US equities exchanges was triggered by a large move in the underlying futures market. The repercussions rattled other markets that trade electronically including bonds and currencies, illustrating the potential risks of a global financial system linked by high-powered computerised trading firms.

The DoJ alleges in a criminal complaint that Mr Sarao used an automated trading program to manipulate the market for S&P 500 futures contracts - known as E-Minis - on the Chicago Mercantile Exchange, the largest US futures market.

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The authorities said he used a variety of trading techniques designed to push prices sharply in one direction and then profit from other investors following the pattern or exiting the market.

The DoJ said by allegedly placing multiple, simultaneous, large-volume sell orders at different price points - a technique known as "layering"- Mr Sarao created the appearance of substantial supply in the market.

Layering is a type of spoofing, a strategy of entering bids or offers with the intent to cancel them before completion.

Spoofing was outlawed in the 2010 Dodd-Frank financial reform legislation. Last year, federal prosecutors brought the first criminal spoofing case, charging a New Jersey trader of manipulating commodities markets and making a $1.6m profit.

It is claimed that Mr Sarao had established companies in Nevis and Anguilla to shelter his assets from tax. According to the criminal complaint, the Nevis -incorporated company was called Nav Sarao Milking Markets Ltd.

Mr Sarao is alleged to have run his operation from his UK residence. The registered address of his company, Nav Sarao Futures Limited, is a modest semi-detached house on a residential street in the Hounslow district of west London. It is about 17 miles west of the City, London's financial centre.

The CME observed that between September 2008 and October 2009 Mr Sarao had engaged in pre-opening activity, specifically, entering orders and then cancelling them that "appeared to have a significant impact on the indicative opening price", according to the complaint.

The CME contacted Mr Sarao and his broker about this activity in March 2009 and notified him, in correspondence dated May 6, 2010, that "all orders entered on Globex during the pre-opening are expected to be entered in good faith for the purpose of executing bona fide transactions".

In response, Mr Sarao wrote in an email to his broker dated May 25 2010 that he had "just called" the CME "and told 'em to kiss my ass".

In a July 7 2010 email to Eurex, he explained that he "trade[d] extremely fast" and claimed that "[a]ll orders are entered/deleted manually by me and only me".

The US government's case was aided by an anonymous whistleblower who investigated the flash crash for hundreds of hours over several years, according to Shayne Stevenson, an attorney for the whistleblower and a partner at Hagens Berman law firm.

After regulators released their findings of the flash crash, the CME vigorously defended the operational integrity of the futures market and the E-Mini contract.

The repercussions of the flash crash included the introduction of circuit breakers to halt trading in US companies should their price change too quickly.

Additional reporting by Mark Odell and Nicole Bullock

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