Navinder Singh Sarao was on Tuesday arrested in London for allegedly causing a “flash crash” in the US in 2010.
The 37-year-old British stock market trader of Indian-origin is now fighting extradition to the US from Britain to face wire fraud, commodities fraud and manipulation charges.
The Crash of 2.45
It happened on Thursday May 6, 2010 and was triggered by a crash in the E-mini S&P 500 futures contracts, which are traded on the Chicago Mercantile Exchange, the largest US futures market.
The contagion quickly spread into the equities market, wreaking havoc. The Dow Jones Industrial Average plunged more than 1,000 points (about 9 per cent) within minutes, only to recover a large part of the loss. The crash briefly wiped out nearly $1 trillion in market value.
How The Crash Happened
Mr Sarao allegedly used an automated programme to generate massive sell orders into the market, pushing down prices. He knew his orders stood little chance of ever being taken up, but he managed to create the impression of massive interest to sell the contract, causing prices to drop. He then cancelled those trades and bought the contracts at the lower prices to benefit when the market recovered, authorities said.
The orders were modified and canceled with split-second precision so that they tracked the actual price of the contracts, but at prices just enough above the going price that Mr Sarao could be confident they would not become actual trades.
Because the orders were big, they helped create the fiction that the market had more depth, or layers of prices, than it actually had. Mr Sarao allegedly set up one firm called Nav Sarao Milking Markets, made use of tactics deployed in the past by high-frequency traders such as “layering” and “spoofing,” under which traders place orders that they cancel before they are executed to create the false impression of demand.
How Was the Case Cracked
The exchange had contacted Mr Sarao on the day of the flash crash to make sure he was placing orders “in good faith.” But only when a whistleblower provided the Commodity Futures Trading Commission with analysis on the trades that the US Department of Justice moved against him.
How Much Did He Make
US regulators estimated that Mr Sarao reaped $879,018 (nearly Rs. 6 crore at 60 rupee per dollar) in net profits from his trading on the day of the flash crash alone. The CFTC said Tuesday that Mr Sarao’s alleged manipulation continued at least through early April of this year. Mr Sarao reaped some $40 million (Rs. 240 crore at 60 rupee per dollar) between 2010 and 2014 trading the futures contracts, according to the US Justice Department.