Trader charged for alleged key role in 'flash crash'

AP News
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Posted: Apr 21, 2015 6:54 PM

CHICAGO (AP) — A multimillionaire futures trader accused of being a key figure in bringing on the 2010 "flash crash" — when the Dow Jones Industrial Average plunged 600 points in five minutes — was arrested in Great Britain Tuesday based on charges filed in Chicago.

Navinder Singh Sarao, 37, allegedly employed lightning-fast software to manipulate the market for E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange, according to a U.S. criminal complaint filed in February and unsealed Tuesday.

The May 6, 2010, "flash crash" rattled investors and left many wondering if the stock market was rigged. What caused it was unclear at the time, but regulators eventually traced one catalyst to trading algorithms gone awry.

High frequency traders such as Sarao use computer programs to buy and sell in milliseconds, scooping up tiny profits that quickly accumulate. They were the focus of the best seller "Flash Boys," by Michael Lewis. The ultra-fast trading is not in itself illegal, but employing the technique to artificially drive prices up or down is.

The complaint portrays Sarao as occasionally brash. It says that weeks after the "flash crash," he bragged in an email to a broker about how he had just told a Chicago exchange official who questioned some of his trades "to kiss my" behind.

Sarao, who typically worked from his home in the west London suburb of Hounslow, earned millions through illegal trading, the complaint says. Between 2010 and 2014, Sarao earned $40 million on E-Mini trading alone, though the complaint doesn't say how much of that was through allegedly illegal trades.

The Feb. 11, 2015, complaint charges Sarao with one count of wire fraud, 10 of commodities fraud, 10 of commodities manipulation and one of "spoofing." Spoofing involves bidding with the intent of quickly canceling the bid.

The United States is seeking Sarao's extradition, the Justice Department statement says. The name of an attorney for Sarao who could comment on the allegations wasn't available in the U.S. court papers.

Sarao defends himself in some emails included in the complaint.

In March 2010, as exchange officials questioned some trades, he said in an email that he executed some merely to show a friend "what occurs on the bid side of the market ... by the high-frequency geeks."

In another, he denied placing orders with the intention of instantly canceling them — emphasizing the claim in capital letters.

"I DO NOT use ANY computer program that minimizes or reduces the (chances) of my trades being filled," he wrote.

The complaint says Sarao engaged in illegal trading from 2009 to 2014, and did so on the day of the "flash crash." That crash slashed share values and led to panicky trading; the Dow eventually closed 348 points lower.

The complaint goes through Sarao's trades on May 6, 2010, in the minutes before and during the five minutes the Dow plummeted. It describes his trades down to fractions of a second to illustrate his impact.

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AP Business Writer Bernard Condon in New York also contributed to this report.

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Follow Michael Tarm on Twitter at http://twitter.com/mtarm