UK trader charged for alleged key role in ‘flash crash’

A multimillionaire high-frequency trader was arrested in London over his alleged role in the May 2010 "flash crash" that briefly wiped out nearly $1 trillion in market value, the first time authorities have blamed manipulation for the turbulence.

The U.S. Justice Department said Tuesday that it had criminally charged Navinder Singh Sarao, 37, of London, with wire fraud, commodities fraud and manipulation.

Sarao 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.

Authorities allege that he generated large sell orders that pushed down prices, and then canceled those trades and bought the contract at lower prices to benefit when the market recovered. Prosecutors said the Chicago Mercantile Exchange's self-regulatory staffers caught wind of some of Sarao's suspicious trades as early as 2009.

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 ass."

Sarao, who typically worked from his home in a west London suburb, 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 told a London court Wednesday he opposed being extradited to the United States.

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.

Traders on Tuesday were skeptical that Sarao could have triggered the flash crash on his own. One said that spoofing was a tactic employed routinely on the market, not just on the day of the flash crash.

"It just feels like a heck of a stretch to me. It looks unfortunately more to me like a witch hunt where people are trying to get a name associated to a problem so everybody can say the case was solved," this trader said, speaking on the condition of anonymity.

Wire services