Alleged ‘Flash Crash’ UK trader arrested on US fraud charges

United States authorities have accused a lone trader based in a house under the flight path of London’s Heathrow Airport for intensifying the 2010 global markets shock known as the flash crash.

The trader, 36-year-old Navinder Singh Sarao, was arrested in the United Kingdom on Tuesday, and the US is seeking his extradition, the justice department said.

In court yesterday, Mr Sarao said he did not consent to be extradited.

According to the US government, Mr Sarao earned almost US$900,000 trading futures on the Standard & Poor’s 500 Index on May 6, 2010 – when investors fleetingly saw nearly $1 trillion of value erased from US stocks in just minutes – and a total of $40 million from 2010 to 2014 buying and selling the contracts.

Although the US alleges that Mr Sarao’s illegal activities spanned from at least June 2009 through April 2014, the government gave special attention to what happened during the flash crash. The trades by Mr Sarao, a resident of Hounslow, London, took place on an exchange run by Chicago’s CME Group.

He had been charged on February 11 with wire and commodities fraud in a criminal complaint filed in federal court in Illinois.

The justice department and the Commodity Futures Trading Commission, which filed a separate lawsuit, said Mr Sarao engaged in illegal trading strategies known as “layering” and “spoofing,” including on the day of the flash crash.

That plunge left regulators and investors searching for answers. The CFTC and Securities and Exchange Commission released a report almost five months after the decline pointing a finger at a jittery market during the European debt crisis, a mutual fund’s large trade and high-frequency traders accelerating their buying and selling then withdrawing from the market.

Mr Sarao was “a significant factor in market imbalance”, the CFTC enforcement director Aitan Goelman said on a conference call with reporters on Tuesday. “Market imbalance was one of the chief conditions that allowed the flash crash to occur.”

Spoofing and layering involve submitting market orders with no intention of filling them, with a goal of pushing prices in a direction favourable to a trader’s strategy. Mr Sarao traded E-mini futures on the S&P 500, the benchmark gauge of US stock prices. The contracts, listed exclusively by CME Group, are among the key ways investors bet on American equities. CME declined to comment on the situation.

Mr Sarao “effectively tethered his orders to the market price, constantly modifying them so that they moved up and down with the market, remaining several ticks above the best offer”, according to the justice department’s complaint.

The strategy “virtually ensured” that his orders would not be filled and Mr Sarao almost always cancelled his bids without executing them, the complaint said.

The US government’s complaint said Mr Sarao used automated trading software that included rules for posting orders in such a way that they were never executed.

He created a new legal entity in April 2010 called Nav Sarao Milking Markets, the justice department said.

On May 6, 2010, CME contacted Mr Sarao to remind him that orders placed on the exchange’s Globex system “are expected to be entered in good faith for the purpose of executing bona fide transactions”, according to the justice department complaint.

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