Rogue trader behind the flash crash
One day in 2010, the stock market lost $1 trillion in a frenzy of buying and selling dubbed the “flash crash”. Investigators traced its source to Navinder Singh Sarao, a 36-year-old with Asperger’s syndrome
AT 6AM on a cold, dark Tuesday morning in April 2015, half-a-dozen plainclothes police officers, two FBI agents and two prosecutors from the US Department of Justice rendezvoused at a McDonald’s on a roundabout near Heathrow Airport in London.
After running through the plan one last time, the group edged out of the car park and onto the suburban streets of Hounslow, eventually coming to a stop
outside a beige, two-storey semi-detached that was indistinguishable from those around it.
Inside, asleep and oblivious to his fate, was Navinder Singh Sarao, a 36-year-old trading savant who’d made $70 million (then about R840 million) rapidly buying and selling financial futures using a keyboard and mouse as if playing a computer game. In the US government’s reckoning, he’d 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 $1 trillion in stocks.
The Americans had been monitoring Sarao from afar for months, reading his emails, tracing his assets and interviewing his associates. Yet none of the investigators had met him and he remained something of an enigma.
They knew he traded alone from his parents’ house, and though he prided himself on being a stranger to Wall Street, records showed he routinely bought more shares than the world’s largest banks and 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 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 around in a Tesco plastic bag.
Sarao’s father answered the door. After gathering his composure, he shouted to his son to get out of bed and come downstairs. Nav, as everyone called him, emerged in the hallway in baggy tracksuit bottoms and a sweatshirt, strands of thick black hair pointing skyward.
“We’re here to arrest you for fraud and manipulating the market,” one of the officers said.
By now, the commotion had attracted the neighbours’ attention. Residents peered through net curtains. Nobody could understand what they might want with the Saraos, a humble, respectable Sikh family who kept to themselves.
Nav’s parents waited in silence as the youngest of their three sons showered and gathered some belongings. As he was led outside, he said to one of the officers, “Wait a minute, bruv.”
There was a soccer match on television that night, and Sarao wanted to run upstairs and record it.
“I’m not sure you’ll have time to watch that son,” came the reply.
OFFICERS began searching the property. Sarao’s bedroom was musty and unkempt. There was a single bed with a Labrador-sized stuffed tiger, a large TV hooked up to a games console, and a framed pair of pink Adidas football boots signed, “To Nav, from Lionel Messi.”
The scene of the crime was a small workstation at the end of the bed that housed Sarao’s computer set-up. There seemed to be nothing state-of-the-art 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 had amassed a fortune and brought the global financial system to its knees? For the investigators, who regarded Sarao as one of the world’s most dangerous market manipulators, it was difficult to fathom.
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 had used his makeshift machine, which he’d 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 funds. Sarao, who’d only later be diagnosed with Asperger’s syndrome (which is on the autism spectrum), didn’t tell his family or friends about his riches because he was worried they’d treat him differently. He ate McDonald’s and travelled around on a bright yellow bicycle with a Lamborghini sticker. He called it his “Lambo”.
When staff at the futures exchange started to question his tactics, Sarao – in a moment now etched into trading lore – told them to “kiss my ass”.
Immediately after his arrest, there was a backlash against his proposed extradition to the United States. For one thing, he was a British citizen who’d never even visited the US on holiday.
For another, “spoofing” – the act of placing orders you intend to cancel before they’re executed – was a brand-new offence. Sarao was only the second person to be criminally charged with spoofing, and the first from outside the US.
The most contentious aspect of the case, though, was the US government’s belief that Sarao had helped trigger a global market crash. The idea that a guy in his bedroom could do this, using what was in essence a souped-up home PC, stretched credulity.
That week, reporters descended on Sarao’s cul-de-sac looking for the inside scoop on the man they’d dubbed the “Flash Crash Trader” and the “Hound of Hounslow”. It was one of those rare financial stories that cross into the mainstream: the genius kid from the wrong side of the tracks who finds himself in the crosshairs of the US government.
By a stroke of serendipity, I had a head start. As a journalist for Bloomberg, I was amazed to discover that an old friend of mine had sat next to Sarao at a small, now defunct firm called Futex when they were starting their careers. As we caught up over drinks, my friend regaled me
He sometimes raked in millions of dollars a day
(From previous page) with stories of Sarao’s outrageous talent and idiosyncrasies. I was hooked.
SITUATED above a supermarket in Weybridge in Surrey, Futex was one of a burgeoning number of so-called “arcades” that sprang up at the turn of the century. This was when trading migrated from physical “pits”, with their hand signals and colourful jackets, to computer screens. The business model was straightforward and, for a while at least, highly lucrative.
Futex would take on a bunch of wannabe traders and teach them the skills they needed to succeed in the markets. Those who thrived were backed with steadily larger sums, while those who failed were cut. Futex made money by taking a share of its traders’ profits and a commission on every trade.
It was a far cry from the gleaming skyscrapers of New York. But for an army of ambitious, almost exclusively male graduates brought up watching movies such as Wall Street but lacking the grades or connections to land a job at JP Morgan, the opportunity was irresistible.
The best day traders could make their own hours, wear flip-flops to work and still pull in mega money, Futex told them in a rousing speech on arrival. All they had to do was correctly predict whether the market would go up or down more often than they were wrong, and they’d be rich and free.
The reality, of course, was that it was extremely difficult to consistently beat the market after costs, particularly when you were so far away from the action. Inevitably, most of those who walked through Futex’s doors failed.
Sarao, however, was uniquely suited to the job. At three years old, he’d learnt his times tables after finding a Little Professor electronic game. By the time he got to school, he could multiply longer numbers in his head. Where other children scrawled their workings on a piece of paper, Sarao found he could hold each step, naturally and easily, in his brain.
“I know it sounds ridiculous, but he was like one of the robots in Westworld or Neo from The Matrix or something,” recalls former Futex trader Leif Cid. “He didn’t just observe the market. He was inside it.”
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 appeared to be a catatonic state. To block out the world he wore a pair of red, heavy-duty ear defenders of the type favoured by road workers. On the rare occasions when he took a break, he stood up and bounded over to the kitchen, where he filled a jug with milk and drank it like a ravenous animal.
New recruits were told to watch out for the quiet guy with the beaten-up brown leather jacket who arrived at 2pm each day to trade the US market from the back of the room. They crowded around the risk manager’s computer to rubberneck at the size of his positions.
By the time Sarao left Futex in 2008, he was worth £2 million (then R28 million). A year later, now mostly operating out of his bedroom, he was up to £12 million (then about R144 million).
Despite his success, Sarao found himself rattled by an unwelcome development. Starting in around 2007, global financial markets became increasingly dominated by a new breed of participant engaged in something called high-frequency trading. These high-frequency trading, or HFT firms, monitored orders entering 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 ultrafast computers. At the heart of high-frequency trading 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. Between them, these small, secretive outfits staffed by maths and science graduates creamed $10 billion (then about R70 billion) a year in profits.
There was nothing inherently illegal about the method (although some HFT firms would go on to be prosecuted for market manipulation), but many questioned its social utility.
In 2014, Michael Lewis, bestselling author of The Big Short and Moneyball, published Flash Boys: A Wall Street Revolt,
a devastating exposé of how markets had mutated to serve the interests of a new financial elite.
The HFT industry countered that a proper analysis showed it actually lowered costs and made trading easier and quicker for everyone.
Buffeted by robots that could react to fresh information considerably faster than he could, Sarao found his profits dwindling. He complained to the regulators and stock exchanges about what he regarded as “the mass manipulation of the high-frequency nerds”.
When nobody paid attention, he made the fateful decision to build a machine of his own to fight back. “If you can’t beat ’em, you may as well join ’em, eh?” he wrote, anonymously, on a popular trading forum. His avatar was the Joker.
Sarao hired a developer to build a program that would fool the HFT firms by firing false signals into the market that he knew the algorithms would 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
‘He was like Neo from The Matrix. He didn’t just observe the market – he was inside it’
the S&P 500 index plummeted 5% in four minutes. Suffice it to say that the introduction of the device marked a leap forward in Sarao’s success as a trader. That day, he made a profit of $879 000 (R6,6 million) – three times the value of his parents’ house. In his best session, the following year, he made $4,1 million (R30 million). The profits kept rolling in until the authorities turned up in Hounslow in 2015.
TO HIS supporters, particularly those on the fringes of the financial ecosystem, he was David taking on Goliath, a Robin Hood-like figure who’d found a way to fight back against a corrupt system. After his arrest, the hashtag #freenav started appearing on Twitter. That week, an online petition was launched to protest against his extradition.
The story took another twist when, stuck in a tiny prison cell, Sarao was unable to get his hands on enough money to pay the £5 million (then R90 million) bail set by the judge. On paper he was worth 10 times that amount but, over the years, he’d entrusted his wealth to a series of colourful investors and entrepreneurs.
With evidence mounting against him and no money to pay his legal bills, Sarao took the only viable option and struck a deal with the US government. The 22 criminal charges against him carried decades in prison, but in return for him pleading guilty to some of the charges and helping the authorities with their investigations, prosecutors agreed to a more lenient sentence. At this point, the government’s grasp of electronic trading was limited, and having an insider explain what he was doing could be invaluable.
Three months later Sarao found himself sitting across the table from half-adozen US investigators and prosecutors in a conference room in the City of London. Before he’d been caught, he’d grown so exasperated by what he saw as the incessant cheating in the markets that he’d taken to recording himself trading. Now, with the videos projected on a large TV screen behind him, he gave the authorities a crash course on how to identify when somebody was cheating.
The information Sarao provided transformed the US government’s understanding of electronic markets. His insights were incorporated into the agencies’ detection software, helping lead to the convictions of more than two dozen traders from banks, hedge funds and even the HFT firms Sarao so despised.
His “home videos” are still shown to investigators and prosecutors in training programmes across the US.
ON 28 JANUARY 2020, I took a seat in the gallery at the back of a large courtroom in Chicago for Sarao’s sentencing. For two years I’d been piecing together his story, showing up at hearings and interviewing everyone I could.
Along the way, See Saw Films, the production company behind Lion and The King’s Speech, had signed on to adapt Flash Crash, my book about the case, with Dev Patel in the lead.
Sarao’s decision-making was often perplexing to me, but I remained enthralled by his ingenuity and his downright refusal to accept the cards he was dealt.
In the days leading up to the sentencing his lawyer, Roger Burlingame, painted him as a kind of idiot savant who was barely able to function in the world without his parents. He cited Simon Baron-Cohen, an autism expert, who said Sarao’s condition made it impossible for him to distinguish in a nuanced way between what was and wasn’t allowed, and warned that sending him back to jail would be highly damaging because he was so sensitive to light and noise.
In a remarkable development, the justice department agreed, asking the judge to show leniency and let Sarao go home – a huge departure from the sentencing guidelines, which suggested he serve a minimum of six-and-a-half years. The investigators had come to know Sarao since his arrest and maintained there was nothing to be gained by putting him behind bars.
When it was his turn to talk, Sarao spoke quietly and slowly.
He’d been addicted to trading, he said, but during his time in prison he came to realise that it wasn’t bringing him “deeper meaning”.
“Money doesn’t buy you happiness,” Sarao said. “And I’m glad I know that now.”
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.”
However, she was adamant that Sarao face some kind of punishment beyond the four months he’d already served in prison. And, in recognition of his medical condition, 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’d committed his crimes. By the following month, the entire world was in lockdown. As ever, the Hound of Hounslow’s timing was impeccable.