Day Trader in Leather Jacket Far Cry From Wall Street Flash Boy

How 'Spoofing' Might Have Crashed the Market

Navinder Singh Sarao always stood out among the day traders sweating it out for small change.

Everybody noticed the lanky Londoner when he removed his leather jacket, snapped on noise-reduction headphones and took a seat in front of his three screens. Not because “Nav,” as he was known, made a scene -- a fellow trader called him distant. The 30 or so who toiled in the nondescript building in a southwest London suburb watched his every move because he did what they desperately wished they could: make a pot of money.

Now, six years after the 36-year-old left the firm where he worked for most of his 20s, his status has been secured: by U.S. claims that he helped cause what came to be known as the flash crash. That 2010 panic briefly wiped more than a trillion dollars of value from stocks around the world, exposed the vulnerability of markets and raised questions about the effectiveness of regulators. Sarao’s arrest on Tuesday didn’t do much to address lingering concerns.

“To say it’s one guy who caused this is ludicrous,” said Remco Lenterman, managing director at market maker IMC Financial Markets in Amsterdam. “To say that it contributed, that makes more sense. Many factors contributed.”

Sarao, unshaven and clad in a long-sleeved yellow t-shirt, appeared in a London court on Wednesday to contest his extradition to the U.S. He was released on bail of 5 million pounds ($7.5 million) by a London judge while he fights off U.S. authorities.

The 22-count criminal complaint charges him with fraud and market manipulation on his way to piling up $40 million. Federal prosecutors in Illinois said his illegal trading helped send the Dow Jones Industrial Average on a wild, 1,000-point ride.

‘Had Balls’

That a lonely trader miles away from the City of London could have upset the world’s biggest stock market became a source of amusement for those posting to the #freenav hashtag on Twitter.

Even this year, employees at Futex, the trading outfit where he worked, spoke of him in revered tones. In a presentation at Kings College, London, in March, a senior trader recounted his memories to a roomful of wannabe traders.

“During the financial crisis, this guy, for want of a better word, had balls,” senior trader Milto Savvidis said in the video posted in March. “He used to get into big positions, he saw the risk, he saw the reward, and he took on the trades.”

Day traders work on the fringe of finance. Futex is one of dozens of firms across the U.K. offering them a place to ply their trade. In exchange for a monthly fee and a share of any profits, they get a desk, screens and the chance to pick up tips. Futex also provides training on subjects like technical analysis, risk-management and psychology.

Without the cushion of a monthly salary or a big-name employer, most last about 18 months, said one who traded there.

Saggy Pants

While many people at the firm were scratching around to make about 500 pounds a week, Sarao was clearing 500,000 pounds trading futures on the Standard & Poor’s 500 Index, said a person who worked there at the time.

Sarao’s status may have been heightened by his reserved demeanor. From 2 p.m. to 9 p.m each day, clad in saggy track pants, a T-shirt and Nike Air sneakers, he rarely looked up from his desk once he’d logged on. He was described by a fellow trader as the epitome of focus, head inches from his screens, as if in another world. When a group of new recruits gathered around his desk one day, he pointed to a graph and told them it was beautiful. When they asked him why, he struggled to articulate what to him seemed so obvious.

Futex’s risk manager kept a log of all the traders’ daily profits and losses on his computer. When he went home for the evening, traders would try and sneak a peak and Sarao was always at the top, one of them said.

Hounslow Home

Sarao, who attended Brunel University in London, has no record of having worked at a major financial firm in the U.S. or the U.K. During the flash crash, Sarao was renting space from a trading firm in the City of London and cleared his transactions through now-defunct MF Global Holdings Ltd., said a person with knowledge of the matter.

Other than a few speeding tickets, Sarao, who was born and has always lived in the U.K., has a clean record and has no prior convictions. His father is retired. Sarao has two brothers, one of whom is an optician and the other works in information technology.

He was arrested by Scotland Yard at the semi-detached home in Hounslow he shares with his parents. Nobody answered the door on Tuesday evening as planes from Heathrow Airport roared overhead. A neighbor in the working-class neighborhood, Harmesh Johal, said a “very nice family” lived there and that a lot of people entered the house around 12:45 p.m. that day.

Futex’s headquarters where Sarao worked are based in a run-down brick office block next to a train station in Woking, a commuter town 30 miles southwest of London. The firm also shares an office building in the shadow of St. Paul’s Cathedral in London with a physical therapist and a personal trainer.

Wall Street

At the London office, where a picture of a Wall Street road sign hangs on the wall, two men dressed in jeans declined to be interviewed for this article and referred questions to Marco Rossi. According to his profile on the Futex website, Rossi helped found Futex in the 1990s with his brother and started his career trading Japanese equity warrants.

When Bloomberg tried to reach Rossi at an office phone, the person who answered declined to comment. There’s no suggestion any of Sarao’s alleged wrongdoing took place while he was at the firm. His lawyer declined to comment following the court hearing.

In 2005, Sarao incorporated Nav Sarao Futures Ltd. as a vehicle for his trading activities. The firm reported losses of 32 million pounds from May 2011 through October 2013, according to the most recent figures filed.

‘Milking Markets’

The trader’s true financial health is hard to decipher and may not become clear until he’s prosecuted for his alleged crimes: he took “significant steps” to protect his wealth, including incorporating another company in Nevis, a Caribbean island in April 2010 named Nav Sarao Milking Markets Ltd., according to the Justice Department.

U.S. authorities say Sarao used software designed to manipulate markets, and he was also charged with spoofing -- an illegal practice that involves placing orders with the intent of canceling them before they’re executed.

‘Old-School’ Trader

Controversy about high-frequency-trading reached a fever pitch last year when Michael Lewis published “Flash Boys,” which argued markets are rigged. HFT firms typically employ teams of technologists and mathematicians to develop secret trading techniques.

Sarao, on the other hand, appears to be largely a solo act who used off-the-shelf software. He later asked to modify the programs so he could rapidly place and cancel orders automatically, according to regulators. He described himself to U.K. authorities as “an old-school point and click prop trader.”

A person who identified himself as Adam Whiting said in a Twitter post that he sat next to Sarao for six months in about

2006.

Whiting describes himself as a futures trader and HFT hater in his Twitter profile. The profile picture is of Jerome Kerviel, whose trading caused a 4.9 billion-euro ($5.3 billion) loss at Societe Generale SA.

“One thing I will say is Nav used to wear a tracksuit every day even when an early millionaire!” Whiting said on Twitter. “From what I remember Nav only loved making money, not spending it.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE