Navinder Sarao flash crash Spoofer or innocent trader ?

So what is he accused of doing ?

Well the allegation is that he purchased some off the peg computer trading software. Then paid to have it modified such that it would help him to hide his orders by placing them as the book changed on a price movement.

Using this software he would then place very significant sell orders in the emini  S&P market (and other markets) slightly above current price. This created the appearance of a large group of sellers in the market and would often give the market a slight downward nudge as traders thought “well if there are all those many sellers just above the market it can’t go up so it may well go down”. The main intention however was to lay bate for  front running computers.  This practice is known as spoofing ie placing orders in the market that you have no real intention of ever allowing to be filled. Spoofing if proven is illegal. Front running does not  have to be illegal.

This technique is well known and although illegal it is alleged is quite commonly used by the larger institutions and is well covered in the book “flash Boys” which no doubt Navinder  had read !

According to the SEC Navinder had allegedly been carrying out this type of trading for several years and built up a trading pot of around $30 million. He had during this period of time apparently received a number of enquiries/warnings from both the American and German exchanges warning him that this type of activity was illegal. He apparently continued to trade. Possibly a big mistake in hindsight.

The main allegation from the SEC appears to relate to the so-called flash crash. A sudden drop in US markets in 2010 that was over and done with and reversed within about 30 minutes. At the bottom of that crash over $570 billion was wiped off the value of stocks and shares. In fact within half an hour all those losses were pretty well fully recovered as the market bounced back. But a lot of traders lost a lot of money as they were stopped out of long positions well before the market bounced back.

On that day the allegation is that the Navinder  placed multiple orders for 100+  E-mini S&P contracts  and then cancelled them over 19,000 times in that single day (spoofing and layering all the way down)  this it is claimed put the equivalent of $200 million of apparent selling pressure   on the market. I’ve seen one claim which suggests that on that day orders entered by the Navinder accounted for nearly 20% of all sell orders entered on the E-mini S&P market. That is truly astounding if true.

Given that spoofing and layering is not at all uncommon in the markets the question really revolves around why Navinder  has been picked on rather than some of the many US institutions that also could be accused of similar activities. We will have to wait and see but my gut feeling is first of all he is not American ! which is not good news for him  -and  secondly whilst  he was carrying out a far from unique practice if the allegations are true he was carrying it out in in a somewhat crude and possibly over the top manner and consequently stuck his head too far over the parapet.

Even so it is interesting to note that the statute of limitations for this crime would have expired in two weeks time so the SEC have hardly rushed themselves.

He apparently faces 22 charges which could total 380 years in jail.  To make things even worse I believe the CME exchange is suing him for $40 million.

The American legal system in such matters is very tenacious and somewhat unforgiving . You only have to look at the case of the NatWest three who were extradited several years ago. Once extradited the US court system tends to push the accused towards a plea-bargain. In other words if you plead innocent and lose the case they throw the book at you. As the “book” is often hundreds of years in jail many accused find the only sensible option is to plead guilty for a significantly more lenient sentence.    I believe one judge described it as the carrot and stick technique where the carrot is if you plead guilty we don’t hit you with a stick !

So if Navinder is extradited I think he could be in serious trouble. I suppose the good news for him is  as with the NatWest three it can actually take many many years for the extradition process to run its course. The bad news is as with the NatWest three they were pretty well bled of all their savings in costs to first fight the extradition and then additional legal costs in fighting the case in the USA.

The claim is that on the day of the flash crash Navinder made around $800,000. Truthfully a drop in the ocean compared to the losses and profits made  on that day. My profits on that day ran into five figures although of course I had no idea what was happening and just let my automated systems  trade for me .

So the bad news for  me is I did not make $800,000 that day although on the positive side I don’t face 380 years in jail !



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