On April 21, 2015, Nvinder Singh Sarao, 36, Hounslow, United Kingdom was named as a Defendant in a criminal Complaint alleging 1 count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and 1 count of "spoofing." United States of America, Plaintiff, v. Nvinder Singh Sarao, Defendant ( Complaint, NDIll, 15-CR-75, February 11, 2015).
NOTE: The Defendant in a criminal Complaint is presumed innocent unless and until found guilty beyond a reasonable doubt in a court of law.
Sarao was arrested and is facing extradition to the United States pursuant to an unsealed Complaint. The allegations suggest that he was responsible (in whole or in part) for the infamous May 6, 2010 "Flash Crash" which saw various market indices plummet within a matter of minutes. At the heart of the government's Complaint is the assertion that Sarao used an automated trading program to manipulate the E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange. As more fully explained in pertinent part in the criminal Complaint:
SARAO's Manipulative Activity Contributed to the Flash Crash
33. Based on my review of documents and conversations with others, including representatives of the CFTC, I know the following information about the Flash Crash. On May 6, 2010, the Dow Jones Industrial Average (the "Dow") plunged by approximately 1,000 points. By early in the afternoon, the Dow was down more than 300 points. In the five-minute span between 1:42 and 1:47 p.m., the Dow fell an additional 600 points. Large sell-side pressure in the E-Mini market (and the resulting price drop for those futures contracts) had spilled into the equities markets and caused the rapid decline. Prices stopped falling when, shortly after 1:45 p.m., the CME paused trading in E-Minis for five seconds, allowing prices to stabilize. By 2:00 p.m., most stocks had recovered, and the Flash Crash was over.
34. Consulting Group analysts have informed me that, early in the morning of May 6, 2010, the CME's order book for E-Minis reflected a divergence in the E-Mini market between buy-side depth and sell-side depth. By early afternoon, sell-side depth was more than twice as large as buy-side depth. As of 1:45 p.m., in reaction to the intense selling pressure, there were few buyers and little liquidity left in the market.
35. According to Consulting Group analysts and the expert, that day, SARAO was active in the E-Mini market on the CME, and contributed to the orderbook imbalance that the CFTC and the Securities Exchange Commission have concluded, in a published report, was a cause, among other factors, of the Flash Crash. Among other activity, SARAO used the dynamic layering technique 21 extensively. SARAO first used the technique that day at approximately 9:20:00.938 a.m., when he placed the following four sell orders nearly simultaneously, starting three ticks above the best ask of $1,163.25: (1) 500 lots at $1,164.00; (2) 600 lots at $1,164.25; (3) 500 lots at $1,164.50; and (4) 500 lots at $1,164.75. SARAO modified the orders repeatedly and then canceled all four of them, without having executed any of them, by approximately 9:26:53.566 a.m. The modifications occurred when the market price changed, so that SARAO's lowest offer typically remained three ticks above the best ask. While this dynamic layering cycle was active, the E-Mini price fell 39 basis points, and SARAO bought 1,606 contracts and sold 1,032 contracts.
36. SARAO's use of the dynamic layering technique was particularly intense in the hours leading up to the Flash Crash. SARAO used the technique continuously from 11:17 a.m. until 1:40 p.m. SARAO began this cycle by placing the following five sell orders nearly simultaneously at approximately 11:17:38.782 a.m.: (1) 600 lots at $1,156.50; (2) 600 lots at $1,156.75; (3) 600 lots at $1,157.00; (4) 600 lots at $1,157.25; and (5) 600 lots at $1,157.50. At approximately 1:13 p.m., SARAO added a sixth sell order for 600 lots, bringing the total to 3,600 lots. The orders were replaced or modified more than 19,000 times before SARAO canceled them, without having executed any of them, at approximately 1:40:12.553 p.m.5 At that point, the aggregate volume of SARAO's orders was nearly equivalent to the aggregate volume of the entire buy-side of the order book.
37. At the same time that SARAO ran this lengthy cycle of the dynamic layering technique, he aggressively used the 188-and-289-lot spoofing technique. Between 12:33 p.m. and 1:45 p.m., SARAO placed 135 sell orders consisting of either 188 or 289 lots, for a total of 32,046 contracts. SARAO canceled 132 of these orders before they could be executed.
38. SARAO's activity created persistent downward pressure on the price of E-Minis. Indeed, during the dynamic layering cycle that ran from 11:17 a.m. to 1:40 p.m., SARAO's offers comprised 20 to 29% of the CME's entire E-Mini sell-side order book, significantly contributing to the order book imbalance. During that period of time alone, the E-Mini price fell by 361 basis points. In total, SARAO obtained approximately $879,018 in net profits from trading E-Minis that day.
39. Based on my review of SARAO's emails, I know that SARAO preferred to trade during periods of high market volatility, as on the day of the Flash Crash. In an email message dated on or about October 21, 2012, SARAO asserted that he had "made the majority of [his] net worth in ... no more than 20 days trading,'' on days when the market was particularly volatile. On the trading days described in this affidavit, SARAO made approximately $8.9 million trading E-Minis. Overall, between 2010 and 2014, SARAO made approximately $40 million trading E-Minis.
40. Around the time of the Flash Crash, SARAO took significant steps to protect his assets. In late April 2010, SARAO established a new entity, Nav Sarao Milking Markets Limited, which was incorporated in Nevis. SARAO appears to have created this company as part of a tax avoidance strategy pursuant to which he 23 also established, in 2012, International Guarantee Corporation, incorporated in Anguilla. Indeed, one of SARAO's so-called "wealth management assistants" described the latter company, in an email to SARAO's FCM dated November 22, 2012, as having been created as part of "tax planning work" undertaken by his firm on SARAO's behalf.
41. In this connection, a representative of SARAO's FCM explained to SARAO in a December 11, 2012 email, summarizing the outcome of the FCM's review and risk assessment relating to trading limits in SARAO's business account, that "the majority of [SARAO's] funds are offshore and what remaining wealth he has in the entity [i.e., Nav Sarao Futures Limited] is tied up in complex structures."
Footnote 5 Over the course of the day, SARAO modified more than 20 million lots, whereas the rest of the market combined modified fewer than 19 million lots
Also, for a trip down memory lane, read September 30, 2010 "Findings Regarding the Market Events of May 6, 2010" by the CFTC and the SEC