Flash crash: Ten days in Hounslow

Five years after the "flash crash" of 2010 caused mayhem in the equity markets, US authorities are focusing on the actions of a futures trader over a 10-day span as a key contributor.

The US Department of Justice has zeroed in on Navinder Singh Sarao's accelerated trading from April 27 to May 6 that year, when the Dow Jones Industrial Average plunged more than 600 points in minutes then quickly rebounded. The DoJ's case focuses on what they perceive to be an intense pattern of market manipulation.

Mr Sarao, a 36-year old British citizen who was operating through a company based at his parents' house in a London suburb, was arrested on Tuesday at the request of US authorities and is accused of contributing to the crash. He has been charged in Chicago with wire fraud, commodities fraud, commodities manipulation and spoofing and will face trial there if he is extradited, which he plans to fight.

The DoJ alleges that Mr Sarao used a commercially available automated trading system to manipulate the market for S&P 500 futures contracts, called e-minis, on the Chicago Mercantile Exchange, the largest US futures market. He is alleged to have used practices called spoofing and layering, where traders send out orders they intend to cancel but bring them profits by trading around the resultant market moves.

"When prices fell as a result of this activity, Sarao allegedly sold futures contracts only to buy them back at a lower price," according to the DoJ. "Conversely, when the market moved back upward as the market activity ceased, Sarao allegedly bought contracts only to sell them at a higher price."

He made about $40m between 2010 and 2014 using this technique, the DoJ estimates.

However, starting on April 27 and continuing on May 4, 5 and 6, Mr Sarao ramped up his efforts, placing multiple, simultaneous sell orders and repeatedly modified them, allowing him to exploit the price movements. On May 6, Mr Sarao used the layering technique "extensively and with particular intensity," starting at 9:20am and continuing until 1:40pm, according to the Justice Department.

"At that point, the aggregate volume of Sarao's orders was nearly equivalent to the aggregate volume of the entire buyside of the order book," the DoJ said. "Over the course of the day, Sarao modified more than 20 million lots, whereas the rest of the market combined modified fewer than 19 million lots."

Joel Smith, Mr Sarao's lawyer, told a court in London on Wednesday that he would fight extradition. He attended school in London and then went to Brunel University. Since graduating, he had worked all his life, including for banks, and has no previous criminal convictions, Mr Smith said.

"He has been raised, educated and lived in this country," Mr Smith told District Judge Quentin Purdy. "He has community ties in this country and nowhere else."

His neighbours in Hounslow, a suburb 17 miles west of the financial heart of London, told the Financial Times that Mr Sarao was unmarried and rarely seen. One said his parents "are humble people" and attend a gurdwara, or Sikh temple, every Sunday.

Judge Purdy in court described Mr Sarao as "a man of means".

He was granted bail of £5.05m on Wednesday.

Mr Sarao may have started the scheme around June 2009, when he emailed his futures brokerage seeking help with programming. He said he wanted a technician at the company that provided his trading software to create extra features for him, including a "cancel if close function, so that an order is cancelled if the market gets close", according to the DoJ.

Later that month, he emailed the software company directly, describing the function he wanted them to design. He said he would "like to be able to alternate the closeness ie one price away or three prices away etc etc", and needed "a facility to be able to enter multiple orders at different prices using one click" and a function that would cause his "order to be pulled if there are not x amount of orders beneath it", according to the DoJ's criminal complaint.

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The CME started to take note of Sarao's trading around 2009, according to the complaint. In March 2010, the exchange contacted his brokerage to alert them to his trading patterns. The company passed on the message to Mr Sarao and told him that the conduct was not allowed.

He apparently responded to both saying 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 geeks". He inquired about another trader, saying, "I see he continues to do this all day every day, yet you have a problem when I showed someone it for 5 mins?"

The CME wrote to Mr Sarao and his brokerage again in May that year, saying 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." Mr Sarao responded to the broker in an email that he had called the CME "and told em to kiss my ass".

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