The suburban rogue trader's algorithms behind the 2010 US flash crash

US authorities accuse British trader Navinder Singh Sarao of manipulating the stock market with fraudulent trades, triggering the 2010 flash crash

US authorities have accused British trader Navinder Singh Sarao of using his IT skills to manipulate the market through fraudulent trades and causing the $500bn 2010 flash crash.

The US government complaint alleges that 36-year-old Sarao, from Hounslow, used trading software to issue substantial sell orders at low prices – which he had no intention of completing. He is said to have made £27m.

The US Commodity Futures Trading Commission (CFTC) said Sarao used software to continuously modify offer prices, so they would not execute in the market. It said he took real futures positions to benefit from a price increase in shares he pretended to sell so, when he cancelled his sell instructions – and the price bounced up – the futures he held sailed past the price he had paid for them. After this point, said the CFTC, Sarao sold those stocks.

“He had a few other techniques to make the market think there was a huge volume for sale when actually it wasn't,” said one IT expert in the trading sector. “This has the effect of pushing prices down and he entered into separate trades that would benefit if the price bounced back up, which it always did since he had artificially depressed it with fake sale orders.”

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Stock market trades at very fast speeds

“This was very clever, very quick, very IT-driven – and very illegal.”

Sarao is fighting extradition to the US.

The trading industry works on timescales of microseconds and milliseconds, so immense volumes of trades, which each make small profits, can add up to very large sums. 

Here follows an extract from the US authorities’ complaint document, showing how fast the trades happen.

March 3, 2014:

At approximately 11:38:27.538 am Sarao placed a 2,000-lot buy order at a price of $1,839.25.

Within 0.2 seconds, he placed a 169-lot sell order at a price of $1,839.50.

Less than one second later, after filling 20 lots of the sell order, he cancelled the 2,000-lot buy order before it had any executions.

At 11:38:31.826 am Sarao flashed another 2,000-lot buy order again at the price of $1,839.25, and filled the remainder of his 169-lot sell order within one millisecond.

At 11:38:32.336 am, approximately one half-second after placing the second 2,000-lot buy order, Sarao cancelled it before it had any executions.

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