The rise and fall of the Hound of Hounslow
One day in 2010, stock markets lost $1trn in what became known as the “flash crash”. US investigators traced its source to a London suburb, where 36-year-old Navinder Singh Sarao had devised a system that made him a fortune. By Liam Vaughan
At 6am on a cold, dark Tuesday in April 2015, half a dozen plain-clothes police officers, two FBI agents and two prosecutors from the US Department of Justice rendezvoused at a McDonald’s on a roundabout near Heathrow. After running through the plan one last time, the group edged out of the car park and onto the suburban streets of Hounslow before halting outside a beige, two-storey semi-detached, with a plastic porch and a satellite dish. The house was indistinguishable from those around it.
Inside, asleep and oblivious to his fate, was Navinder
Singh Sarao, a 36-year-old trading savant who had made $70m by rapidly buying and selling financial futures using a keyboard and mouse as if playing a computer game. In the US government’s reckoning, he had also helped precipitate the fastest and most mysterious market collapse in recent history, the so-called flash crash of 2010, when, without warning, markets around the world suddenly tanked, temporarily erasing $1trn in stocks’ values.
The Americans had been monitoring Sarao from afar for months. Yet none of the investigators had met him, and he remained something of an enigma. They knew that Sarao traded alone from his parents’ house, and that he prided himself on being a stranger to Wall Street and the controversial world of high-frequency trading, or HFT, which he derided as being full of “geeks”. But records showed that he routinely placed bigger bets than the world’s largest hedge funds. They’d heard stories of Sarao harassing staff at the Chicago Mercantile Exchange, the electronic marketplace where he plied his trade: one employee was left shaken when Sarao, in an accent somewhere between cockney and rudeboy, reportedly threatened to cut off his thumbs. Yet Sarao’s brokers described him as a pussycat who got lost on his way to their office and carried his papers in a Tesco bag.
Sarao’s father answered the door, shouting to his son to get out of bed and come downstairs. Nav, as everyone called him, emerged in baggy tracksuit bottoms and a sweatshirt, strands of thick black hair pointing skyward. “We are here to arrest you for fraud and manipulating the market,” one of the officers said. By now, the commotion was attracting attention. Neighbours peered through net curtains. Police aren’t an uncommon sight in Hounslow, one of west London’s poorer neighbourhoods, but they rarely arrive so mob-handed, and nobody could understand what they might want with the Saraos, a humble, respectable Sikh family who kept to themselves and attended the local gurdwara. Nav’s parents waited in silence as the youngest of their three sons gathered some belongings. As he was led outside, he said to one of the officers, “Wait a minute, bruv”. There was a football match on television that night, and Sarao wanted to record it. “I’m not sure you’ll have time to watch that, son,” came the reply. Around noon, officers began searching the property. Sarao’s bedroom was musty and unkempt. There was a single bed, a large TV hooked up to a games console, and a cabinet containing pomades and lotions. Against a wall was a framed pair of pink Adidas football boots signed, “To Nav, from Lionel Messi”.
The scene of the alleged crime was a workstation at the end of the bed that housed Sarao’s computer set-up. There seemed to be nothing terribly unusual about it: a desktop with three screens connected to a standard broadband line, a couple of hard drives, a slightly dated-looking camcorder. So this was where Sarao brought the global financial system to its knees? For the US investigators, who regarded Sarao as one of the world’s most dangerous market manipulators, it was difficult to fathom.
“Even when he was raking in millions,
Sarao didn’t tell people. He still ate at McDonald’s and travelled by bicycle”
According to the complaint, Sarao had devised an automated system to place huge numbers of buy or sell orders into US markets, enticing others to follow suit, and then cancel them before they were executed. By misleading other market participants about supply and demand, he was able to nudge markets higher or lower while simultaneously buying and selling himself to capitalise on the move. For five years, Sarao used his makeshift machine, which he christened “NAVTrader”, with remarkable success, raking in sometimes millions of dollars in a day. Bizarrely, he barely spent any of the money, squirrelling it away instead in offshore vehicles, to which he gave names like the “NAV Sarao Milking Markets Fund”. Sarao, who would later be diagnosed with Asperger syndrome, didn’t tell people about his winnings. He ate at McDonald’s and travelled by bicycle. When staff at the exchange questioned his tactics, Sarao – in a moment now etched into trading lore – told them to “kiss my ass”.
After Sarao’s arrest, there was a backlash against his proposed extradition to the US. For one thing, he was a British citizen. For another, “spoofing” (the act of placing orders you intend to cancel before they’re executed) was a new and controversial offence in financial circles – because its victims were mostly hugely profitable algorithmic trading firms whose modus operandi was to monitor other participants’ orders and try to jump ahead of them using super-fast computer systems. The most contentious aspect of the case, though, was the US government’s belief Sarao had helped trigger a global market crash. Sarao traded instruments called S&P 500 E-minis, which track blue-chip US
stocks. It’s a vast market: $200bn of trades each day. The idea that a guy in his bedroom could up-end it using a souped-up home PC stretched credulity. Little wonder that reporters descended on Sarao’s cul-de-sac looking for a scoop on the man they dubbed the “Flash Crash Trader” and the “Hound of Hounslow”. It was a rare financial story that crossed into the mainstream: the genius kid who finds himself in the cross hairs of the US government.
Sarao’s career had begun at the offices of a small firm called Futex, situated above a Waitrose in Weybridge, Surrey. Futex was one of many so-called arcades that sprang up at the turn of the century, when trading migrated from physical “pits”, with their hand signals and colourful jackets, to computer screens. The business model was simple and, for a while, highly lucrative. Futex would take on wannabe traders and teach them the trade. Those who thrived were backed with larger sums; those who failed were cut. It was a far cry from the glitz of Canary Wharf. Candidates replied to an ad in the Evening Standard: “Wanted. Trainee Futures Traders.” Must “work well under pressure”.
For an army of ambitious, almost exclusively male graduates who had watched but lacked the grades or connections to land a job at JPMorgan, the opportunity was irresistible. The best day traders, they were told, could make their own hours and pull in footballer money. All they had to do was predict whether the market would go up or down. The reality, of course, was that it was extremely difficult consistently to beat the market after costs, and most who walked through Futex’s doors failed. Sarao, however, was uniquely suited to the job. As a young child, he’d discovered a natural ability to multiply long numbers in his head. As a teenager he became obsessed with computer games, particularly breaking into the top 1,000 of three million players globally. That combination of instant recall, lightning reactions and intense focus was tailor-made for a style of trading known as “scalping”, which involves rapidly buying and selling as markets shift, never holding a position for more than a few seconds.
Wall Street
FIFA,
For eight hours a day, Sarao sat at a lone desk at the far end of the trading floor, his face inches from his screens, in what seemed to be a catatonic state. To block out the world he wore a pair of heavy-duty ear defenders of the type favoured by road workers. Just occasionally, he would bound over to the kitchen, where he’d fill a jug with milk and drink it like a ravenous animal. New recruits were told to watch out for the quiet guy with the beatenup brown leather jacket, who arrived at 2pm each day to trade the US market. They rubbernecked at the size of his positions. By the time Sarao left Futex in 2008, he was worth £2m. A year later, mostly operating out of his bedroom, he was up to £12m.
But then came an unwelcome development. From around 2007, global markets became increasingly dominated by a new breed of participant engaged in something called high-frequency trading. These HFT firms monitored orders to the market from pension funds, banks and the like for clues as to whether prices would rise or fall, then jumped ahead of the predicted move using ultra-fast computers. At the heart of HFT were algorithms – sets of rules instructing computers to react to shifting market conditions with very little human intervention. By 2010, half of all transactions in major futures and stock markets passed through the hands of one HFT firm or another – mainly small, secretive outfits, staffed by maths and science graduates, that creamed $10bn a year in profits. There was nothing inherently illegal about the method, but many questioned its social utility.
Buffeted by robots that could react faster than he could, Sarao found his profits dwindling. Fatefully, he decided to fight back – hiring a developer to build a programme that would fool HFT firms by firing false signals into the market for algorithms to pounce on. One of the first times he used his new spoofing machine was 6 May 2010, the day of the so-called flash crash, when the S&P 500 index fell 5% in 4 minutes. Suffice it to say the new device marked a leap forward in Sarao’s success as a trader. That day, he made a profit of $879,018 – three times the value of his parents’ house. The money kept rolling in until the authorities turned up in 2015.
After his arrest, some saw Sarao as a Robin Hood figure taking on a corrupt system. The hashtag #freenav appeared on Twitter, and a petition was started against his extradition. The story took another twist when, stuck in a cell in Wandsworth prison, Sarao was unable to pay the £5m bail set by the judge. On paper he was worth ten times that amount but, over the years, he’d entrusted his wealth to a series of colourful investors and entrepreneurs. When his lawyers tried to retrieve the cash, they found it had disappeared. With evidence mounting and no money to pay his legal bills, Sarao struck a deal with the US government. The 22 charges against him carried decades in prison – but if the Department of Justice (DoJ) were to recommend a more lenient punishment, Sarao would plead guilty to some of the charges and help the authorities with their investigations. In the days leading up to Sarao’s sentencing, his lawyer, Roger Burlingame, painted him as a kind of idiot savant, barely able to function without his parents. In a remarkable development, the DoJ agreed, asking the judge to show leniency and let Sarao go home – a huge departure from official guidelines suggesting he serve a minimum of six and a half years.
“The judge said she was expecting a criminal mastermind – not ‘someone with
autism’ who lives with his parents”
On 28 January, 2020, Sarao was sentenced in a Chicago courtroom. When it was his turn to talk, Sarao spoke quietly. “I spent 36 years trying to find happiness on a path built on a lie,” he told the judge. “I made more money than I could have imagined. I did the things society says will give you happiness, and when they didn’t, I didn’t know where to look.” Summing up the case, the judge said that when she first heard the facts, she assumed she was dealing with some kind of criminal mastermind. “Now, here I am looking at this report of someone with autism who lives with his parents in a bedroom that looks as if it hasn’t been changed since he was 13 years old.”
The judge was adamant that Sarao face some kind of punishment, beyond the four months he’d spent in Wandsworth, for “abusing the integrity of the market”. On 28 January 2020, in recognition of his medical condition, she ordered him to serve a year of incarceration at his parents’ house. That night, Sarao arrived back at Heathrow and prepared to hole up in the same bedroom where he had committed his crimes. The following month, the entire world was in lockdown. As ever, his timing was impeccable.
A longer version of this article appeared in The Times. © News Licensing 2020.
Flash Crash: a Trading Savant, a Global Manhunt and the Most Mysterious Market Crash in History
Liam Vaughan is published by William Collins (£20).
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