UK trader accused of ‘flash crash’ fights extradition to US

The 36-year-old, from Hounslow, west London, is charged with wire fraud, commodities fraud and market manipulation – after billions of dollars were wiped off the value of US shares in a matter of minutes. The US Department of Justice is requesting his extradition after he was arrested in connection with the 2010 “flash crash”.

Despite US opposition, he was granted bail set at £5.1m at Westminster magistrates’ court on Wednesday after telling the judge he opposed extradition. His lawyer, Joel Smith, said: “This is a matter that has come as something of a bolt from the blue for Mr Sarao.”

The court heard that the British-born former bank worker and Brunel University student lived with his parents and has two brothers, an optician and an IT worker.

Mr Sarao is also facing civil claims from US regulators who allege he and his company, Nav Sarao Futures Limited, made $40m (£27 million) over five years. Nav Sarao Futures Limited is registered at the house above in Hounslow.

Spoofing

The US Department of Justice said Sarao is charged with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of “spoofing”, a practice of bidding or offering with the intent to cancel the bid or offer before execution.

He is accused of using an “automated trading programme” to manipulate the market for futures contracts on the Chicago Mercantile Exchange. His alleged manipulation earned him significant profits and contributed to a major drop in the US stock market on 6 May 2010 that came to be known as the “flash crash”, US prosecutors claim.

The crash saw the Dow Jones industrial average plunge 600 points in five minutes.

The Justice Department said in a statement: “When prices fell as a result of this activity, Sarao allegedly sold futures contracts, only to buy them back at a lower price. Conversely, when the market moved back upward as the market activity ceased, Sarao allegedly bought contracts, only to sell them at a higher price.”

The US Commodity Futures Trading Commission accuses Navinder Singh Sarao of market manipulation over five years, and as recently as 6 April 2015.

(Traders on the New York stock exchange on 6 May, 2010)

What is spoofing?

Navinder Singh Sarao is accused of a type of “spoofing”, an illegal practice that sees fake trades placed and then cancelled in a matter of seconds to artificially manipulate the market.

Documents filed with a US court by the FBI claim Sarao carried out a spoof practice called “layering”, using “commercially available trading software” that allows traders to “communicate with markets as quickly as possible and to place, modify, and cancel multiple orders nearly simultaneously”.

While these “spoof” electronic trades are cancelled in the blink of an eye – before they are completed – they are in place long enough to have an effect on market prices.
Traders can use this market volatility to make real trades at more advantageous prices, allowing them to make vast profits.

For example, they may enter a spoof sale order for shares or futures, which, following the rules of supply and demand, will create a drop in prices. This will then allow them to buy that product at a lower price than they might otherwise have been able to do, creating an opportunity for a higher profit margin when the price goes back up again.