Flash Crash
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When I embarked on this project at the start of 2018, Nav had already pleaded guilty to spoofing and wire fraud. As part of his plea deal he agreed to provide the US government with ongoing assistance in building other cases, and his sentencing was delayed. By the time the book was completed twenty-four months later, Nav still hadn’t been sentenced, meaning there was no possibility of interviewing him. I did, however, provide a detailed list of facts to Nav’s camp, and I am grateful for the feedback they provided ahead of publication. The manuscript has been neither seen nor approved of by Nav. I look forward to the day he can tell his own story.
FOOTNOTES
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CHAPTER 3: THAT’S A FUGAZI
fn1. Nav’s forum username has been changed.
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CHAPTER 5: RISE OF THE ROBOTS
fn1. Trading Technologies is a trading software provider.
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CHAPTER 16: JESUS ENTERS
fn1. IXE and Alejandro Garcia declined to answer questions or be interviewed for this book. The company said in a statement it considered the information presented in this account ‘tendentious’ and it ‘did not agree with the publishing context’.
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NOTES
PROLOGUE
That afternoon, both the DOJ and the CFTC: ‘Futures Trader Charged with Illegally Manipulating Stock Market’, Department of Justice, 21 April 2015, www.justice.gov.
‘CFTC Charges UK Resident Navinder Singh Sarao and His Company Nav Sarao Futures Limited PLC with Price Manipulation and Spoofing’, Commodity Futures Trading Commission, 21 April 2015, www.cftc.gov.
Why was there no suggestion of market manipulation: ‘Findings Regarding the Market Events of 6 May 2010’, a joint CFTC and SEC report, 30 September 2010, www.cftc.gov.
only the second individual to be criminally charged: the first was a former pit trader from Brooklyn named Michael Coscia who was indicted on 2 October 2014, by the US Attorney’s Office for the Northern District of Illinois with commodities fraud and spoofing in seventeen different markets including gold, copper and currency futures.
those entities Michael Lewis dubbed: Michael Lewis, Flash Boys: A Wall Street Revolt (New York: W. W. Norton & Company, 2014).
‘How One Man Crashed the Stock Market’: Michael Maiello, Daily Beast, 22 April 2015.
‘I don’t know about computers’: Marcus Leroux and Harry Wilson, ‘British Trader Accused of Sparking Wall St “Flash Crash” from West London Semi’, The Times (London), 22 April 2015.
CHAPTER 1: WORK WELL UNDER PRESSURE
‘Wanted. Trainee Futures Traders’: Classified ad in the Evening Standard newspaper, early 2003.
‘A very likeable young man’: Louise Eccles, ‘Wolf of Wall Street? More Like Hound of Hounslow’, Daily Mail, 23 April 2015.
‘Prankster’ who ‘got away with things’: Camilla Turner, James Titcomb and Gordon Rayner, ‘Flash Crash Trader a “Prankster Who Always Got Away with It”, Friends Say,’ Daily Telegraph, 22 April 2015.
burgeoning number of arcades: the terms ‘trading arcade’ and ‘prop shop’ are often used interchangeably but, strictly speaking, the business models are different. Traders in a pure prop firm trade for a firm-wide account and the profits are divvied up by management, whereas in an arcade they trade for their own account and hand over a percentage of their profits.
a small sum on each trade: The life cycle of a trade is actually two transactions – a trader buys some futures then sells the same number to close out their position or vice versa. Thus the term ‘round-trip’.
Wall Street: Directed by Oliver Stone (Los Angeles: 20th Century Fox, 1987).
Trading Places: Directed by John Landis (Los Angeles: Paramount Pictures, 1983).
‘rude manners’: Wikipedia entry on ‘Royal Exchange, London’.
‘Day One Traders’: Special thanks to John Sussex, whose first-hand account of his experiences in the Liffe pits, recounted in the excellent Day One Trader: A Liffe Story (New Jersey: John Wiley & Sons, 2009), proved invaluable.
known as ‘liquidity’: Liquidity is defined by the website Investopdeia as ‘the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value.’ In markets, it refers to how easily an asset can be bought or sold at ‘stable, transparent prices’. The market for a one-off painting, for example, is less liquid than that for medium-size family homes, which is less liquid than that for shares in Apple.
according to myth: John Sussex, Day One Trader (John Wiley & Sons, 2009).
even in 2018, women only comprised: Anna Irrera, ‘Wall Street Wants More Female Traders, but Old Perceptions Die Hard’, Reuters, 14 June 2018.
In 1997, a statue was erected: the bronze sculpture, the Liffe Trader, was made by Stephen Melton to commemorate fifteen years of Liffe. Today it is displayed at the south ambulatory of Guildhall, Gresham Street, London.
Most historians of financial markets: Allan Grody and Hughes Levecq, ‘Past, Present and Future: The Evolution and Development of Electronic Financial Markets’, NYU Stern School of Business, November 1993.
The postmortem revealed: Mark Carlson, ‘A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response’, Finance and Economics Discussion Series, Federal Reserve Board, Washington, DC, November 2006.
The industry’s reputation: Eric Berg, ‘46 Commodities Traders Indicted After a 2-Year F.B.I. Investigation’, New York Times, 3 August 1989.
Then, when volumes started sliding: Estelle Cantillon and Pai-Ling Yin, ‘How and When Do Markets Tip? Lessons from the Battle of the Bund’, Working Paper Series No. 766, European Central Bank, June 2007.
Liffe’s share of the all-important: Cantillon and Yin, ‘How and When Do Markets Tip?’
classic texts: Market Wizards by Jack D. Schwager contains interviews with high-profile traders. It was first published by HarperCollins in 1989. Reminiscences of a Stock Operator (Wiley), first published in 1923, is a fictionalised account of the life of trading legend Jesse Livermore by Edwin Lefèvre. Steidlmayer on Markets: Trading with Market Profile examines the use of charts to recognise patterns and identify trading opportunities. It was written by traders J. Peter Steidlmayer and Steven B. Hawkins and first published in 2003.
CHAPTER 2: THE BOY PLUNGER
coined the term ‘flow’: Mihaly Csikszentmihalyi, Flow: The Psychology of Happiness: The Classic Work on How to Achieve Happiness (New York: HarperCollins, 1990).
‘You’d hear people say …’: Wherever Nav is quoted speaking to a friend, here and throughout the text, his words are based on that friend’s detailed recollections of the conversation. In some cases those recollections are backed up by contemporaneous notes.
More than $200 billion of e-minis: E-mini S&P 500 Daily Volume, https://cmegroup.com.
a feature available on the CME called an ‘iceberg’: Iceberg orders are used by market participants to execute large orders with minimum impact on the market. A fund looking to buy $1 billion of e-minis at a price of 1,500, for example, may use the feature to disguise the size of their overall position by executing the purchases in $50,000 installments as and when the e-minis become available so the market doesn’t spike while they’re carrying out the trade, causing them to pay more.
This perpetual gamesmanship: Scott Patterson, ‘CFTC Targets Rapid Trades’, Wall Street Journal, 15 March 2012.
‘There is nothing new in Wall Street’: Edwin Lefèvre, Reminiscences of a Stock Operator (New Jersey: John Wiley & Sons, 1994).
shooting himself in the head: Diana B. Henriques, ‘A Speculator’s Life Is Still Elusive’, New York Times, 9 September 2001.
CHAPTER 3: THAT’S A FUGAZI
Published a book called The Wave Principle, by Ralph Nelson Elliot, first published in 1938.
CHAPTE
R 4: THE TRADE I
If it wasn’t the Chinese: The ‘Plunge Protection Team’ is a moniker given to the President’s Working Group on Financial Markets, a group of the foremost US regulators and government officials. The group was set up by Ronald Reagan after the 1987 Wall Street Crash to foster better communication between government agencies in times of market stress. It is the subject of frequent speculation that it intervenes in markets to serve US government ends. The Bilderberg Group is a group of around 150 leading global politicians, financiers and businessmen who meet up once a year to discuss world affairs. It is also a frequent subject of conspiracy theories.
texted his boss: James B. Stewart, ‘The Omen’, New Yorker, 13 October 2008.
Unlike most of the firm’s elite traders: Stewart, ‘The Omen’.
he’d made a profit of around $2 billion: here and throughout the text, non-US currencies have been converted into dollars using contemporaneous exchange rates unless specified.
Between 2 January and 18 January: From ‘Mission Green’, Société Générale’s internal report into the Kerviel affair, 20 May 2008, www.societegenerale.com.
the bank had lost €4.9 billion: SG internal report, 20 May 2008.
the biggest fine ever levied on an individual: Kerviel was released from jail in 2014 after serving just five months. Two years later, his €4.9 billion fine was cut by a French judge to €1 million.
CHAPTER 5: RISE OF THE ROBOTS
The term is somewhat vague and ill-defined: A. Kirilenko, A. Kyle, M. Samadi and T. Tuzun, ‘The Flash Crash: The Impact of High Frequency Trading on an Electronic Market’, Working Paper, 1 October 2010.
The first HFT firms: Getco – the Global Electronic Trading Company – was founded in 1999 by ex-Chicago pit traders Stephen Schuler and Daniel Tierney. Jump Trading was founded the same year by Paul Gurinas and Bill DiSomma, who both also started in the Chicago pits.
In 2003, HFT firms: precise figures on the preponderance of HFT are hard to come by pre-2012, when the CFTC started publishing data. The 2008 estimate here comes from a 3 May 2010, report by Aite Group titled ‘High Frequency Trading in the Futures Market’. The 2012 figures come from a Reuters report dated 23 August 2013, titled ‘CFTC Finalizes Plan to Boost Oversight of Fast Traders: Official’, which cites New York consultancy TABB Group estimates (although when I contacted TABB myself, they were unable to provide figures).
Jump, a firm of a few dozen employees: Saijel Kishan and Matthew Leising, ‘Don’t Tell Anybody About This Story on HFT Power Jump Trading’, Bloomberg, 24 July 2014.
The same year, Citadel: Jenny Strasburg, Scott Patterson and Lavonne Kuykendall, ‘High-Frequency Gain: Citadel Unit’s $1 Billion’, Wall Street Journal, 5 October 2009.
the CME Group, which had only recently: the CME Group was formed in 2007 by the merger of Chicago’s two main futures exchanges, the Chicago Mercantile Exchange and the Chicago Board of Trade. It has since added a number of other global exchanges to its portfolio. It consistently reports operating margins of around 60 per cent, making it one of the most profitable members of the S&P 500. In 2010, it reported profits of $951 million on revenues of $3 billion.
William Shepard, another longtime: Kishan and Leising, ‘Don’t Tell Anybody’.
‘Given that HFTs are very short-term intermediaries’: ‘HFT and the Hidden Cost of Deep Liquidity’, Pragma Trading, 2012, https://www.pragmatrading.com.
The small number of researchers: one example of such research is ‘High Frequency Trading – Measurement, Detection and Response’, a research note by Credit Suisse analysts Jonathan Tse, Xiang Lin, and Drew Vincent, 6 December 2012.
‘What happens if a major event causes turmoil’: Joe Saluzzi, ‘HFT Roundtable’, Themis Trading blog, 17 June 2009, https://blog.themistrading.com.
‘never-ending socially-wasteful arms race for speed’: Eric Budish, Peter Cramton, and John Shim, ‘The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response’, Quarterly Journal of Economics 130 (November 2015).
HFT firms largely eradicated losses: Although that didn’t necessarily mean they were profitable, since the cost of technology and data were high and rising.
They also helped create a situation: I was unable to source figures for cancellation rates in 2010, but by 2015, as many as 95 per cent of orders on the CME were cancelled before they were executed, according to University of Southern California professor Larry Harris’s testimony during Nav’s extradition hearing.
electronic trading pioneer Thomas Peterffy: in March 2019, Peterffy, the founder and CEO of Interactive Brokers, was ranked the sixty-third-richest American by Forbes magazine, which estimated his net worth at $17.1 billion. Timber Hill was sold to a rival in 2017.
‘We feel like Robin Hood’: Michael Stothard, ‘Norway’s Day Traders Take on the Algos’, Financial Times, 16 May 2012.
CHAPTER 6: END OF AN ERA
according to Nav’s recollection: Paolo’s recollection is slightly different. He says he did call Nav, but his concern was that Nav had left such a large position on overnight when he wasn’t in a position to get out of it quickly. He wasn’t worried there was no stop-loss in place.
where he shared the fairways: Lawrence Donegan, ‘Golf Goes for the High Rollers’, Guardian, 11 May 2005.
‘Legend has it that just outside London’: Trader Monthly was shut down in 2009 and is no longer available online. This extract was taken from a Facebook page called ‘Great Traders’ operated by a firm called Varchev Financial Services. It is also referenced on various trading forums.
CHAPTER 7: THE TRADE II
CFT was founded by a high-rolling day trader: Braveheart’s real name is Andy Priston. The ‘premiere issue’ of Trader Monthly was dated 2004.
CHAPTER 8: A BRIEF HISTORY OF SPOOFING
‘’Tis a trade founded in fraud’: Defoe’s essay, ‘The Anatomy of Exchange Alley’ (1719), is available on The Literary Encyclopaedia, www.litencyc.com.
Spoof was the name of a card game: Word History, Merriam-Webster, www.merriam-webster.com.
One of the earliest references to spoofing in relation to financial mar63 kets: Gretchen Morgenson, ‘Chasing Ghosts at Nasdaq’, New York Times, 12 December 1999.
orders and front-running: front-running is the prohibited practice of placing a trade based on nonpublic information regarding a pending transaction. A broker-dealer, for example, may place a trade for its own account before executing a large transaction on behalf of a customer that it knows is likely to move the market; or a local in the pit may get wind of an incoming order and position himself to benefit. Since the emergence of electronic trading and HFT, what does and doesn’t constitute front-running has become less clear-cut.
a new function called: ‘Avoid Orders That Cross’ is a legitimate function offered by TT that allows traders with positions on both sides of the market to avoid trading with themselves. It works by automatically cancelling a trader’s resting orders if the same entity tries to hit into them. For example, imagine that the current best offer for wheat futures is $100.00 a bushel and a firm has placed a resting order to sell ten lots for $100.25 in the ladder, where they sit behind another forty lots at that price. If that same entity suddenly decided it wanted to buy wheat and placed a hundred-lot order at $100.25, above the prevailing price, the program would simultaneously cancel its own ten sell orders and pick up the other forty lots.
Rotter’s cover was blown on a forum in 2004: Imogen Rose-Smith, ‘Flipping Out’, Trader Monthly, date unknown. A copy of the article is available at https://largecaplinks.files.wordpress.com/2015/04/paulrotter-trader-monthly.pdf.
But in March 2009: Criminal complaint against Navinder Sarao, US Department of Justice, 21 April 2015, www.justice.gov.
The brokers at GNI were officially supposed to: this requirement is contained in ‘Rule 166.3 – Supervision’ of the Commodity Exchange Act.
CHAPTER 9: BUILDING THE MACHINE
On Friday 12 June 2009,
Nav emailed his broker: correspondence contained in the appendix to the CFTC’s Motion for a Statutory Restraining Order, filed in the Northern District of Illinois, 17 April 2015.
thereby limiting any potential damage: in fact, to avoid suspicion, Nav wanted the program to allow one-lot orders to trade into his resting orders; any more than that and his spoofs would be modified and sent to the back of the line.
CHAPTER 10: THE CRASH
The previous day, over a few hours: USA v. Navinder Singh Sarao, DOJ Criminal Complaint, 21 April 2015, www.justice.gov.
seven times what his hero, Lionel Messi: according to CNN, Messi was earning around $45 million a year in 2010, including endorsements and sponsorship deals. That amounts to about $125,000 a day. ‘Messi tops Beckham in football rich list’, CNN.com, 24 March 2010.
‘This order is not in the book’: DOJ complaint, 21 April 2015, www.justice.gov.
Unemployment was up by 50 per cent: ‘UK Unemployment Increases to 2.51 Million’, BBC, 12 May 2010.
Nav bided his time until 3:20 p.m.: DOJ complaint, 21 April 2015, www.justice.gov.
That barrage sat in an order book that was already severely imbalanced: ‘Preliminary Findings Regarding the Market Events of May 6, 2010’, CFTC and SEC, 18 May 2010, www.sec.gov.
Terrified market participants: ‘Findings Regarding’, CFTC and SEC, 30 September 2010, https://www.cftc.gov.