UK trader arrested for manipulating stock market and triggering 2010 "Flash Crash"

A trader who played the world’s futures markets from a small suburban house in Hounslow, West London, has been arrested and faces extradition to the US after allegedly making $40m (£27m) for his possible role in the so-called “flash crash” of 2010.

According to the US Department of Justice (DoJ), Navinder Singh Sarao, 37, used illegal trading techniques that added to an abrupt stock market crash on May 6, 2010, when the Dow Jones industrial average dropped 600 points in a matter of minutes before pulling back.

That case raised concerns about the underlying structure of the stock market and underscored the dangers of so-called computer generated high-frequency trading.

Sarao flooded the market with multiple, large sell orders for futures contracts called E-Minis, which traders use to speculate on the direction of the S&P 500 index, according to the criminal complaint, and which created the appearance of heavy supply in the market and drove prices down.

He supposedly canceled most of the orders before they were executed. Sarao then profited by buying and selling futures contracts when the market plunged and also when it recovered.

On the day of the Flash Crash, the complaint says Sarao made nearly $9 million trading E-Minis. He allegedly made about $40 million from 2010 to 2014.

Sarao traded primarily through his own company, Nav Sarao Futures Limited, on the Chicago Mercantile Exchange. The Commodities Futures Trading Commission also filed a civil complaint against Sarao.

The affidavit released by DoJ officials detailed some of the replies Sarao is said to have given which the Guardian quotes.

He explained his 2014 successes to the Financial Conduct Authority by saying “he had always been good with reflexes and doing things quick”. He also apologised to the Chicago Mercantile Exchange and his broker in March 2010 after placing a large number of cancelled orders, which he said occurred after he had been demonstrating to a friend what was done “by the high-frequency [trading] geeks”.

The flash crash occurred at 2.45pm on 6 May 2010 – the date of the last general election. Wall Street was concerned about the looming debt crisis in Greece and the Dow Jones index was already down by about 300 points, only for markets to fall further – about 600 points in five minutes.

It was the biggest intra-day decline in Wall Street history, although most of the loss was regained within 20 minutes. Its cause is explained by several theories, from a single fat-finger trade, to the machinations of high-frequency traders and a computer glitch.