New Details on Flash Crash Trader Legal Case 

Flash Crash Trader E-Mails Show Spoofing Strategy, U.S. Says

• Failed orders are `costing me,’ Sarao said to tell programmer
• Indictment’s new details seen bolstering U.S. extradition case

The British day trader accused of contributing to the 2010 flash crash enlisted a computer programmer to help him work out a system to manipulate stock prices, e-mailing pleas for help perfecting his “spoofing” efforts, U.S. prosecutors said in an indictment.

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“I need to know whether you can do what I need, because at the moment I’m getting hit on my spoofs all the time and it’s costing me a lot of money,” Navinder Singh Sarao wrote in a February 2009 e-mail to a programmer he’d tapped to build trading software, according to the grand jury indictment filed Thursday in federal court in Chicago.

Those new details expand the government’s explanation of how the 36-year-old day trader built a system for placing orders he would enter and then pull off the market before they were executed, citing e-mails that lay out Sarao’s plans in his own words.

Prosecutors allege Sarao entered one in five sell orders during the May 6, 2010, frenzy known as the flash crash, when almost $1 trillion was wiped from the value of U.S. equities. Sarao, currently in the U.K., faces a Sept. 25 extradition hearing in London.

Extradition Hearing

Until now, the charges against Sarao had been based on an FBI agent’s affidavit. The indictment’s additional details could bolster the U.S. argument for extraditing him.

“Having the suspect apparently confirming the accuracy of the U.S. case theory in his own e-mails can only strengthen both the extradition request and the ultimate chances for the prosecution at trial,” said Stephen Pollard, a London-based lawyer at WilmerHale.

Sarao has denied wrongdoing. Kimberly Perrotta Cole of Kobre & Kim LLP, who has represented Sarao in a related matter, didn’t immediately respond to requests for comment.

Manipulative Bids

Sarao placed his allegedly improper trades on an exchange owned by Chicago-based CME Group Inc. His product of choice: futures contracts on the Standard & Poor’s 500 Index, the benchmark gauge of U.S. stock prices.

At CME, prospective buyers submit their bids and sellers place offers into an order book, which goes 10 levels deep on either side of the current market price.

Because Sarao allegedly never wanted his manipulative bids and offers to be executed, he wanted his software to keep those orders at the “back of the book,” or as far from current prices as possible, according to the indictment. If prices approached those of his phantom orders, he wanted the software to withdraw them — what Sarao called “cancel if close,” according to e-mails summarized by the U.S.

Sarao enlisted the programmer’s help around January 2009, according to the indictment. In a Jan. 26, 2009, e-mail with the subject line, “Good news at last,” Sarao told the programmer that he had an automated trading program up and running. We “now need to make it workable in terms of me moving the market like we discussed,” he is cited as saying. The indictment doesn’t identify the programmer.

The two worked together through 2009, and in November Sarao enlisted the help of a second programmer who offered a setup that Sarao wrote he “found really useful,” according to the indictment.

“Want to Spoof It”

The Sarao e-mails, as presented by the government, lay out what appear to be clear plans: “If I am short I want to spoof it [i.e., the market] down” with orders that wouldn’t be seen. “I want to put these join offer orders in the system much like a normal order but they are only seen when the market bid is taken out, or when the market goes offered.”

The CME contacted Sarao about his trading activities in March 2009 warned him in October 2010 that an anti-spoofing provision in the Commodity Exchange Act had become law, according to the indictment.

Nearly three years later, his brokers reminded him of the provision, which prohibits entering bids or offers with the intent to canceling them before execution. That, according to the indictment, elicited this May 2013 e-mail to a broker: “Lol, guarantee if I switch on my computer I’ll see the same people breaking all those rules, day in, day out.”

Sarao made about $900,000 on the day of the May 6, 2010, crash, the U.S. contends, and $40 million over four years using similar techniques on the CME Group Inc. stock futures market.

Sarao was arrested in April at the home he shares with his parents near Heathrow Airport in London, sending shock waves through the financial industry. He spent four months in a London prison while his lawyers contested his bail terms.

“Breaking Rules”

Sarao was originally granted bail on a 5 million-pound ($7.6 million) security but it later emerged his assets were frozen by the U.S. leaving him unable to pay. He was released from jail in August after disclosing the existence of roughly 25 million pounds worth of additional assets invested in Switzerland.

The 22-count indictment details Sarao’s conduct between 2009 and 2014, charging him with fraud and market manipulation. The U.S. levied the same allegations in a criminal complaint earlier this year.

Source: Bloomberg – Flash Crash Trader E-Mails Show Spoofing Strategy, U.S. Says

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