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
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
With Sarao facing extradition what happens now?
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
"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