by Shlomo Maital
Navinder Singh Sarao
I read this story today in Bloomberg Business, and still just can’t believe it. But it’s true. *
The young man in the photograph is named Navinder Singh Sarao. Today he is in a 10 ft. by 6 ft. cell at Wandsworth Prison, one of Britain’s worst jails.
Why? Five years ago, his actions allegedly contributed to wiping more than $1 trillion in assets off financial markets. Trillion here, trillion there, pretty soon, you have a problem.
Here is the story. Sarao was a graduate trainee at Futex, a company that specializes in trading stocks and other assets. Here is their calling card: “We believe that keeping mind, body and intellect nurtured leads to overall well-being, which is essential for successful trading. Our approach keeps these in balance, and since 1990, when Futex was founded, has helped many traders reach their goals.” Translation? We make money, scads and scads of it, any way we can.
Sarao was an instant sensation. While other traders were eking out 500 pounds a week, Sarao was clearing 500,000 pounds! He always sat by himself. And he spent almost nothing. He was extremely frugal. On a good day, Sarao made $130,000, and even on a bad day, $70,000. He got to keep 90 per cent of the money he made for Futex. But he felt it was not enough. He ended his contract at Futex and went to CFT Financials, a firm that rented out space to private traders. He got backing and technology from MF Global Holdings, the now defunct firm run by former US Senator Jon Corzine that incurred enormous losses for its investors.
“I want to be the biggest trader,” Sarao said.
According to U.S. allegations, Sarao began “a massive effort to manipulate” stock futures on Globes, an electronic trading platform. This involved “spoofing”. It is an illegal technique that involves flooding the market with bogus buy or sell orders to drive prices up or down, then cancelling the orders. Spoofing is rampant today. Sarao built computer algorithms, in June 2009, to change the way his orders would be perceived by other computers. (A very large fraction of trading today, in financial markets, is done by computers, not by humans).
On May 6, 2010, there was a “flash crash”. More than $1 trillion was wiped off the markets in the space of a half hour. Sarao allegedly made $900,000, using an algorithm that gave a misleading impression of the volume of sell orders.
After this crash, suspicion fell on high frequency trading firms – firms that buy and sell assets, using super computers that identify opportunities and act on them in micro-seconds, far faster than humans can. In late April of this year, Scotland Yard knocked on his door in Hounslow, a Western neighborhood of London, and accused Sarao of helping to cause the flash crash.
Yes, a glorified day trader living with his mom and dad near Heathrow Airport nearly destroyed the world. Why don’t you buy a Bugatti? His friends asked. I don’t know how to drive, he answered.
Sarao will soon return to court, in his gray prison tracksuit, and for the 8th time sit in the dock, as the U.S. tries to extradite him on 22 counts, from wire fraud to market manipulation. Sarao denies the charges. Many doubt that he or anyone else singlehandedly caused the flash crash. The truth is, COMPUTERS, not humans, drive markets today. But you can’t put a super computer in jail. Sarao said last May, “I’ve not done anything wrong apart from being good at my job”.
“This guy had balls”, said a Futex trader who knew him. “He used to get into big positions, he saw the risk, he saw the reward, and he took the trades.”
If Sarao is guilty, we should worry about how one person can destroy the market. If he is innocent, we should worry that financial markets are unstable, prone to huge swings and are easy to manipulate, by those who operate in the shadows.
Either way, we are in big trouble.