On March 9, US stocks had their biggest one-day point drop ever as the economic fallout from the novel coronavirus sank in. Within a week that record had been broken twice, only for the S&P 500 to register its greatest weekly gain in decades in April, after the Federal Reserve intervened by slashing interest rates and buying bonds.
This rattle of volatility arrives 10 years after another famously tumultuous episode in the markets – the so-called Flash Crash of May 6, 2010, when, without warning, the S&P 500 plummeted 5 per cent in four minutes, temporarily erasing $US1 trillion.
The incident sparked a government investigation and led to questions about whether the rise of high-frequency trading was having a destabilising impact on the markets. In the end, the US Department of Justice focused on a different culprit: a 36-year-old day trader named Navinder Singh Sarao who operated out of his bedroom in his parents’ suburban semidetached house on the outskirts of London.
With no ties to the world of high finance, Sarao accumulated $US70 million buying and selling futures as if he were playing a computer game. The bulk of his winnings came during periods of extreme volatility. He also manipulated the markets, according to the US government, creating a computer program that placed, then cancelled huge volumes of orders to deceive other participants about supply and demand – a brand-new offence known as “spoofing”. Authorities were careful to assert that Sarao’s antics had only contributed to the crash, essentially by creating false signals others reacted to, but that nuance was lost in the ensuing news coverage.
In 2016, Sarao struck a plea deal with US authorities, agreeing to tell the authorities everything he knew in exchange for a more lenient sentence. The information he provided on the dark arts of electronic trading proved so useful, the government incorporated it into its detection software, helping to lead to spoofing convictions for more than a dozen traders from banks, hedge funds, and high-frequency trading firms.
In recognition of his cooperation and a diagnosis of Asperger’s, Sarao was spared jail in January, sentenced instead to a year under house arrest – a month before the entire world went into lockdown. More painful for him, Sarao was also banned from trading during the kind of wildly careening markets he relished. This is the story of how Sarao first discovered his knack for playing that game.
Read the full story here.