Evidence mounts against ‘flash trader’

The British trader accused of aiding the 2010 flash crash hired a computer programmer to work out a system to manipulate stock prices.

Chicago - 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, US prosecutors said in an indictment.

“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. 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 US equities.

Sarao, currently in the UK, faces a September 25 extradition hearing in London. Until now, the charges against him had been based on an FBI agent’s affidavit. On August 17, US District Judge Ruben Castillo gave prosecutors until mid-October to file an indictment against Sarao. By adding details from the e-mails about Sarao’s alleged spoofing plans, the indictment could bolster the US argument for extraditing him.

“Having the suspect apparently confirming the accuracy of the US 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.

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

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

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

Manipulative bids

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 summarised by US prosecutors.

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 his matrix was running and that we “now need to make it workable in terms of me moving the market like we discussed,” according to the indictment, which 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.

Stock futures

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

He was originally granted bail on a 5 million-pound ($7.6 million) security but it later emerged his assets were frozen by the US 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.

BLOOMBERG