The City of London woke up on Wednesday to the shock news that a lone British prop trader had been arrested and charged by US authorities with market manipulation linked to the May 2010 “Flash Crash.”
Navinder Singh Sarao was arrested in London on Tuesday.
He was charged by the Commodity Futures Trading Commision (CFTC) and US Department of Justice (DOJ) with one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation and one count of spoofing, a practice of placing an order with the intent of cancelling it before it can be completed.
Sarao was in Westminster Magistrates Court on Wednesday faced with the possibility of extradition to be charged in a US court.
But who is Sarao and what sort of trader was he?
According to former colleagues, "Nav” was known for taking large positions which could lead to heavy losses or stellar profits.
“He traded huge amounts and this day would have been no different. He would frequently have swings of more half a million, his profit and loss moved daily. He was a big player," a source told FOW.
According to a former colleague Nav would often come into work later – to get an off-peak train fare – and wait until late in the day for lunch – “That way he could go and buy a sandwich at 4 and get it half price.”
He was reportedly a successful trader, which led to frequent increases to his trading limits. A source told FOW that at one London-based prop trading firm he had a limit to trade up to 20,000 lots of S&P Futures.
“It wasn’t so much about the money. Of course he wanted to trade higher amounts but that was because he wanted to beat the system,” said a former colleague of the trader who would often work with a “hoody up” to avoid contact with colleagues.
The sources questioned the idea that Sarao had used HFT techniques to manipulate the market but admitted ‘layering’ - placing multiple, simultaneous, large-volume sell orders at different price points to create the appearance of substantial supply in the market - was fairly commonplace in 2010.
Other FOW sources have questioned whether a lone prop trader could have helped cause such a catastrophic market event.
Christopher David, counsel at international law firm WilmerHale, told FOW it is unlikely Sarao will be extradited immediately unless he consents. “Extradition proceedings can take months,” he added.
According to a report from Sky News on Wednesday, Sarao has reportedly said he will contest the request to extradite him to the US.
David also said it is too early to tell whether he will decide to face a jury rather than negotiate a settlement.
“Of course if Mr Sarao is innocent then he should defend himself in front of a jury but he will face a long battle with significant legal fees and a high risk of a large prison sentence at the end of it.
"It is faced with this choice that many defendants negotiate a plea they can live with out of pragmatism, irrespective of whether they actually did anything wrong,” said David.
“Following high profile and controversial extradition proceedings the British Government amended the UK legislation in October 2013 to introduce a ‘forum bar’ which allows a court to bar an extradition where a substantial measure of the requested person’s conduct was performed in the UK and where it is in the interests of justice to do so,” he added.
It is not known if this is a route by which Sarao could successfully resist extradition “but it may well be an interesting test of the new legislation,” said David.