The 2010 Flash Crash wasn’t just a financial hiccup; it was a moment of chaos that sent ripples through the global economy, leaving traders and regulators scrambling for answers. Within minutes, the Dow Jones plunged 1,000 points, wiping a trillion dollars off the value of US companies. Luckily the markets soon recovered. Five years later, Navinder Singh Sarao emerged as one of the unlikely individuals behind the incident.
Navinder Sarao, a British trader operating from his parents’ suburban home in Hounslow, West London, was accused of contributing to the 2010 Flash Crash. In 2015, the US Department of Justice charged Sarao with commodities fraud, wire fraud, and market manipulation. After a long legal battle, Navinder was extradited to the United States in 2016 and pleaded guilty in 2017.
Sarao’s story reads like a movie script. The son of Indian immigrants, he had a knack for numbers from an early age and went on to earn a degree in computer science from Brunel University. He entered the world of high-frequency trading after a brief stint at a local accounting firm.
His trading strategies were anything but ordinary, however. Utilizing custom-made algorithms, Sarao would place and cancel large orders to manipulate the market’s perceived liquidity. This practice, known as “spoofing,” created artificial price movements that allowed him to profit from the resulting market volatility.
On the day of the Flash Crash, Sarao’s manipulative trading reached unprecedented levels. As the market already faced a tumultuous day due to the European debt crisis, Sarao’s aggressive spoofing tactics amplified the chaos. His trading accounted for an astonishing 29% of all sell orders in the E-mini S&P 500 futures market. The overwhelming volume of these orders contributed to a market panic, ultimately leading to the crash.
The Flash Crash sent shockwaves through the financial world, prompting increased scrutiny on high-frequency traders and their practices. Regulators worldwide took measures to prevent similar incidents, such as implementing circuit breakers to halt trading in case of extreme market fluctuations.
Sarao’s arrest and subsequent extradition sparked debate about the fairness of singling him out for the Flash Crash. Many argue that he was a scapegoat, chosen to bear the brunt of the blame for a larger systemic issue within the financial industry. Others claim that his manipulative tactics, while not solely responsible for the crash, played a significant role in exacerbating market instability.
The legal aftermath of the Flash Crash proved to be a turning point for Sarao. In November 2020, he was sentenced to a year of home confinement and ordered to forfeit $12.8 million in ill-gotten gains. His cooperation with authorities, including providing valuable insights into the world of high-frequency trading, earned him a reduced sentence.
Today, Sarao is far from the wealthy trader he once was. At 46, he lives on government benefits in his parents’ home, a shadow of the man who once moved markets with a few keystrokes. In 2020, there was talk of a movie being released with Dev Patel playing the lead role. New Regency and See-Saw Films bought the film rights but the project seems to have stalled.
