US Seeks to Extradite UK Algo Trader


In a press release dated April 21st 2015 the US Commodity Futures Trading Commission announced:

The unsealing of a civil enforcement action in the U.S. District Court for the Northern District of Illinois against Nav Sarao Futures Limited PLC (Sarao Futures) and Navinder Singh Sarao (Sarao) (collectively, Defendants).  The CFTC Complaint charges the Defendants with unlawfully manipulating, attempting to manipulate, and spoofing — all with regard to the E-mini S&P 500 near month futures contract (E-mini S&P). The Complaint had been filed under seal on April 17, 2015 and kept sealed until today’s arrest of Sarao by British authorities acting at the request of the U.S. Department of Justice (DOJ).  After the arrest, the DOJ unsealed its own criminal Complaint charging Sarao with substantively the same misconduct.

It seems that the CFTC has a less than secure grasp of UK corporate law, since over on this side of the pond companies are either "Limited" or "Public Limited" but not both. A quick search of Companies House reveals that the former applies in this case, and that Nav Sarao Futures Limited is in fact registered as limited company number 05497320. The CFTC announcement goes on to say that:

According to the Complaint, for over five years and continuing as recently as at least April 6, 2015, Defendants have engaged in a massive effort to manipulate the price of the E-mini S&P by utilizing a variety of exceptionally large, aggressive, and persistent spoofing tactics.  In particular, according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&P central limit order book (the Layering Algorithm), with each sell order one price level from the other.  As the E-mini S&P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price.  Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions.  According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days.

The Department of Justice's own press release on the matter says that:

Navinder Singh Sarao, 36, of Hounslow, United Kingdom, was arrested today in the United Kingdom, and the United States is requesting his extradition.  Sarao was charged in a federal criminal complaint in the Northern District of Illinois on Feb. 11, 2015,  with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of “spoofing,” a practice of bidding or offering with the intent to cancel the bid or offer before execution.

According to allegations in the complaint, which was unsealed today, Sarao allegedly used an automated trading program to manipulate the market for E-Mini S&P 500 futures contracts (E-Minis) on the Chicago Mercantile Exchange (CME).  E-Minis are stock market index futures contracts based on the Standard & Poor’s 500 Index.  Sarao’s alleged manipulation earned him significant profits and contributed to a major drop in the U.S. stock market on May 6, 2010, that came to be known as the “Flash Crash.”  On that date, the Dow Jones Industrial Average fell by approximately 600 points in a five-minute span, following a drop in the price of E-Minis.

According to the complaint, Sarao allegedly employed a “dynamic layering” scheme to affect the price of E-Minis.  By allegedly placing multiple, simultaneous, large-volume sell orders at different price points—a technique known as “layering”—Sarao created the appearance of substantial supply in the market.  As part of the scheme, Sarao allegedly modified these orders frequently so that they remained close to the market price, and typically canceled the orders without executing them.  When prices fell as a result of this activity, Sarao allegedly sold futures contracts only to buy them back at a lower price.  Conversely, when the market moved back upward as the market activity ceased, Sarao allegedly bought contracts only to sell them at a higher price.

The charges contained in the complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

The story has generated a number of reports in the Great British Press (GBP for short), some of which are more sensationalist than others. The Daily Telegraph coverage is comparatively sober, and under the headline "Flash crash trader Navinder Singh Sarao 'sat on £27m fortune while his mother worked two jobs'" they report today that :

Mr Sarao denies any wrongdoing and his family believe he has been “set up”.

On Wednesday he appeared before Westminster Magistrates Court in London for a preliminary extradition hearing, and was granted bail conditional on him providing £5 million as a surety.

His full extradition hearing is expected to take place in August.

The Daily Mail's current conclusion (see the "sensationalist" link above) is that:

Modern financial markets, where the speed of software, computers and communications really matter, have opened a new front for the hucksters to dupe a financial system that is vulnerable to manipulation.

It is comforting to know that even if British investigators remain complacent, the Americans are showing a grim determination to clean up the system and make the crucial business of capitalism safer.

However it seems that The Mail has a less than secure grasp of ancient futures markets like the CME and "the crucial business of capitalism", since they also point out that:

Sarao allegedly used an automated computer program to trick the markets into generating orders to sell large numbers of shares – it is claimed more than £100 million worth. (Though it's unlikely he actually owned those shares, it's possible for traders to 'borrow' shares and bet that the market will fall in the hope of cashing them in at a lower price.)

That is comforting to know.

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