In his own words, emails to FCA and R J O'Brian http://images.businessweek.com/bloomberg/pdfs/CFTC-Sarao-filing-emails.pdf
Trader Tied to Flash Crash Says He Changed His Mind a Lot Don't Miss Out — Follow us on: Facebook Twitter Instagram Youtube by Tom Schoenberg 6:27 PM BST April 23, 2015 Share on FacebookShare on Twitter Excerpt of an email from Nav Sarao to Joanna Jasina included in the CFTC court filing. Source: CFTC court filing How 'Spoofing' Might Have Crashed the Market A self-described insomniac, Navinder Singh Sarao railed against high-speed traders for corrupting financial markets and defended his own rapid-fire success as the benefit of a quick mind. “I trade very large, but change my mind in a second,” wrote Sarao in a May 2014 e-mail to the U.K. Financial Conduct Authority before he was accused this week in the U.S. of contributing to the 2010 flash crash. These new details, gleaned from pages of e-mails and documents released by U.S. authorities as part of their case against him, are at odds with the public profile that has so far emerged of the 36-year-old Londoner. He worked out of sight, sometimes from his parents’ suburban home, before his arrest this week and was described by one fellow trader as distant. The Sarao revealed in court records is a squeaky wheel, well known to his brokers and software providers, who he harassed for not enabling him to trade as fast as he wanted. He corresponded, too, with regulators, including those who are now under scrutiny for not detecting earlier how his methods may have contributed to white-knuckled moments on May 6, 2010, when $1 trillion of value was briefly erased from U.S. stocks. Market Intuition In defending his propensity for submitting and then almost immediately canceling trades -- an allegation central to manipulation charges against him -- Sarao told regulators he relied on market intuition. The records also show the firms he worked with to lower his taxes and to run his business included banks in Switzerland and Dubai, and brokers at MF Global Holdings Ltd. and R.J. O’Brien & Associates. Trading Technologies Inc. and Edge Financial Technologies Inc. are identified in the documents as the software providers that Sarao used to get an upper hand and to help him disguise his orders from high-frequency traders. Sarao, who goes by Nav, also said his investing style was a reaction to speed traders, who he said could manipulate the market based on his orders without any repercussions. He said his software and his distance from Wall Street made his transactions “miles too slow” to compete with flash traders operating out of the U.S. “I don’t like the HFT arena and have complained to the exchange numerous times about their manipulative practices, please BAN IT,” Sarao told the FCA in the May 2014 e-mail. ‘Using Mouse’ While high-frequency trading has no exact definition, it includes strategies such as using ultra-fast technology and placing computer servers close to exchanges to react to market data as quickly as possible. Armed with computer algorithms, Sarao relied on some of those techniques, but he also told regulators he was old school. “To this day I am still using the mouse to trade,” he wrote in the e-mail to the FCA. And if what regulators say about Sarao’s manipulation is true, some high-frequency traders could have been his victims. The Justice Department and Commodity Futures Trading Commission said he engaged in spoofing, the practice of rapidly submitting fake orders and then withdrawing them to move prices to his benefit. Because spoofing typically happens in milliseconds, high-frequency trading firms are the most likely to be harmed. “It sounds like the regulators came after him and he tried to deflect attention from himself on to high-frequency traders,” said Bill Harts, chief executive officer of HFT advocacy group Modern Markets Initiative. “I think that’s all we need to know about his credibility.” ‘Not Vanity’ Sarao, who said he started his one-man operation in July 2005, first cleared his transactions through MF Global, the now-defunct firm that was headed by Jon Corzine. After MF Global collapsed in 2011, he traded through Marex Spectron and Knight Execution & Clearing Services LLC before settling on Chicago-based R.J. O’Brien. Spokesmen for Marex, Knight and MF Global, as well as the software providers either declined to comment or didn’t immediately return phone messages. R.J. O’Brien cooperated with the investigation and “had no involvement whatsoever” with Sarao or his company at the time of the flash crash, Ellen Resnick, an outside spokeswoman, said in an e-mailed statement. In 2007, Sarao wrote to the founder of the company that published Trader Monthly, asking how he might be included on their list of 30 distinguished traders under the age of 30. He told the publication he made between $45,000 and $133,000 each day. “You must understand that for me to be in the top 30 is not a vanity thing,” Sarao wrote. He said that while he normally preferred a low profile he was looking to set up a new trading business and the publicity might help. Stashed Profits Sarao made $40 million manipulating futures tied to the Standard & Poor’s 500 Index, including about $900,000 on the day of the flash crash, according to authorities. A CFTC investigator said most of Sarao’s profits were stashed in a variety of offshore vehicles and business ventures. One of his companies, based in Anguilla, had $17 million in a Swiss bank account, a document released by the CFTC shows. At a bail hearing Wednesday, his lawyer said Sarao has 5 million pounds ($7.5 million) in trading accounts, 4.7 million pounds of which is a loan, and 100,000 pounds in “numerous betting accounts.” While seeking explanations from brokers at R.J. O’Brien in October 2012 on why his system was so slow, Sarao’s frequent e-mails to two brokers throughout the weekend caused one to ask whether he ever slept. “I normally can’t get to sleep before 4 a.m., which isn’t a problem because U.S. trading opens at 2:30 p.m. here,” Sarao responded in an e-mail sent at 2:51 a.m. “I have made the majority of my net worth in, I would say, no more than 20 days of trading. That’s how I trade -- mostly I hardly work but when it’s volatile I have to work 12 hours a day,” he wrote.
CFTC court filing http://www.cftc.gov/ucm/groups/publ...cuments/legalpleading/enfsaraoorder041715.pdf
CFTC press release CFTC Charges U.K. Resident Navinder Singh Sarao and His Company Nav Sarao Futures Limited PLC with Price Manipulation and Spoofing The CFTC Complaint Alleges that Defendants’ Manipulative Conduct Contributed to the Market Conditions that Led to the May 6, 2010 Flash Crash Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the unsealing of a civil enforcement action in the U.S. District Court for the Northern District of Illinois against Nav Sarao Futures Limited PLC (Sarao Futures) and Navinder Singh Sarao (Sarao) (collectively, Defendants). The CFTC Complaint charges the Defendants with unlawfully manipulating, attempting to manipulate, and spoofing — all with regard to the E-mini S&P 500 near month futures contract (E-mini S&P). The Complaint had been filed under seal on April 17, 2015 and kept sealed until today’s arrest of Sarao by British authorities acting at the request of the U.S. Department of Justice (DOJ). After the arrest, the DOJ unsealed its own criminal Complaint charging Sarao with substantively the same misconduct. The Standard & Poor’s 500 Index is an index of 500 stocks designed to be a leading indicator of U.S. equities. The E-mini S&P 500 is a stock market index futures contract based on the Standard & Poor’s 500 Index and is one of the most popular and liquid equity index futures contracts in the world. The contract is traded only at the Chicago Mercantile Exchange (CME). According to the Complaint, for over five years and continuing as recently as at least April 6, 2015, Defendants have engaged in a massive effort to manipulate the price of the E-mini S&P by utilizing a variety of exceptionally large, aggressive, and persistent spoofing tactics. In particular, according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&P central limit order book (the Layering Algorithm), with each sell order one price level from the other. As the E-mini S&P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price. Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions. According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days. The Complaint alleges that Defendants often cycled the Layering Algorithm on and off several times during a typical trading day to create large imbalances in the E-mini S&P visible order book to affect the prevailing E-mini S&P price. Defendants then allegedly traded in a manner designed to profit from this temporary artificial volatility. According to the Complaint, from April 2010 to present, Defendants have profited over $40 million, in total, from E-mini S&P trading. As alleged in the Complaint, Defendants were exceptionally active in the E-mini S&P on May 6, 2010, commonly known as the Flash Crash Day. On the afternoon of that day, the E-mini S&P market price suffered a sharp decline, followed shortly thereafter by sharp declines in the prices of other major U.S. equities indices and individual equities. After a few minutes, markets quickly rebounded to near previous price levels. According to the Complaint, Defendants utilized the Layering Algorithm continuously, for over two hours, immediately prior to the precipitous drop in the E-mini S&P price, applying close to $200 million worth of persistent downward pressure on the E-mini S&P price. According to the Complaint, Defendants’ manipulative activities contributed to an extreme E-mini S&P order book imbalance that contributed to market conditions that led to the Flash Crash. The Complaint further alleges that Defendants engaged in a variety of other manual spoofing techniques whereby Defendants allegedly would place and quickly cancel large orders with no intention of the orders resulting in transactions. At times, according to the Complaint, this manual spoofing was used to exacerbate the price impact of the Layering Algorithm. CFTC Director of Enforcement Aitan Goelman commented: “Protecting the integrity and stability of the U.S. futures markets is critical to ensuring a properly functioning financial system. Today’s actions make clear that the CFTC, working with its partners on the criminal side, will find and prosecute manipulators of U.S. futures markets wherever they may be.” In its ongoing litigation, the CFTC is seeking permanent injunctive relief, disgorgement, civil monetary penalties, trading suspensions or bans, and payment of costs and fees. As noted above, the U.S. Department of Justice filed a related criminal action charging Sarao with manipulation, attempted manipulation, spoofing, and wire fraud on February 11, 2015, in the U.S. District Court for the Northern District of Illinois. In conjunction with that action, Scotland Yard took Sarao into custody today, at his residence in London. Sarao awaits extradition to the United States on these charges. Given Defendants’ ongoing unlawful conduct and the potential for dissipation of Defendants’ ill-gotten gains, on April 17, 2015, U.S. District Judge Andrea R. Wood issued an Order freezing and preserving assets under Defendants’ control and prohibiting them from destroying documents or denying CFTC staff access to their books and records. The Court has scheduled a hearing for May 1, 2015, on the CFTC’s motion for a preliminary injunction. The CFTC thanks and acknowledges the assistance of the CME, the U.S. Department of Justice, the Federal Bureau of Investigation, the U.K.’s Financial Conduct Authority, Scotland Yard, and the Securities and Exchange Commission. CFTC Division of Enforcement staff members responsible for this matter are Jeff Le Riche, Jo Mettenburg, Jenny Chapin, Jessica Harris, Allison Sizemore, Carlin Metzger, Elizabeth Padgett, Mary Lutz, Jeri Cobb, Jordon Grimm, and Charles Marvine.
Sarao cancelled 99 percent of orders - CFTC civil complaint n">(Reuters) - Navinder Singh Sarao, the futures trader charged with market manipulation that contributed to the May 2010 Wall Street "flash crash," was cancelling more than 99 percent of his orders on days examined by the U.S. Commodity Futures Trading Commission, according to civil-case documents filed with the U.S. District Court of Northern District of Illinois. The CFTC asked Terrence Hendershott, a professor at University of California-Berkeley, to examine Sarao's activities to determine whether they had a legitimate business purpose. The days he examined showed that Sarao cancelled more than 99 percent of the orders that he submitted through his algorithm, whereas other traders with orders larger than 200 lots cancelled only 48 percent of the time. They also found that Sarao modified his orders, on average, 161 times, compared with an average 0.1 modification for other traders' orders. Hendershott declined comment when reached by Reuters. Sarao, 36, is accused by U.S. authorities of using an automated programme to "spoof" markets by generating large sell orders that pushed down prices.
"He is accused of using computer programs to create 'spoof' transactions on the Chicago Mercantile Exchange, and faces charges which could carry a 380-year prison sentence" http://www.dailymail.co.uk/news/art...ntage-City-dealers-worth-millions-pounds.html
I get it now. This dude was basically spoofing entirely to cause front-running parasitic HFT to buy/sell with the direction of his order as he's filled on the other side and then flips to do the same thing the other way - pulling money out of size and spread. Pretty classic spoofing and flipping. Rotter did the same thing right? HFTs and big boys don't like getting played like this as they would prefer they are the only ones with a license to juice everyone out. He's been on someone's interest list for a while and they're using the flash crash as an excuse to take him down. Big boys and HFTs then go back to having the market to themselves again. Same ole shit different day. The rich get richer.
The funny thing is that the illegal part wasn't the big spoof orders. It was the little ones (where he made his profits).