The British futures trader dubbed the
'Hound of Hounslow’ who was arrested in April over
manipulative trading behaviour back in 2010 is due in court
Friday for his extradition hearing. His case has sparked media
and market interest, and has caused a shift in attitudes to
market surveillance and the systems available to catch
Navinder Singh Sarao was arrested earlier this
year at the order of US authorities following allegations
of manipulation that led to the 'Flash Crash’ in
After months in custody – he was finally granted bail in August
– Sarao is set to appear at Westminster Magistrates on
Friday to fight his extradition to the US for prosecution
The case thrust the murky-sounding
practice of 'spoofing’ – the practice of
placing an order with the intent of cancelling it before it can
be completed - in to the public domain.
With the charges against Sarao including
one count of wire fraud, 10 counts of commodities fraud, 10
counts of commodities manipulation and one count of spoofing,
they carry a maximum sentence of 380 years.
As previously reported, US authorities
have estimated that the alleged activity which led to the
'Flash Crash’ resulted in profits of $40 million
from April 2010.
While there is market sentiment,
especially amongst London’s prop community, that
Sarao is being made 'an example’ of, Sarao faces a
long prison sentence in the US if he loses
If the recent conviction of Tom Hayes -
who is now serving a 14-year sentence over rate rigging - is
anything to go by, then the future looks rather gloomy for the
Hound of Hounslow.
Media attention – fascination
even – on how one trader’s action could
cause such catastrophic market damage, has been rife, and has
also led to a marked increase in company attention and
investment in surveillance technology to help catch and curb
manipulative behaviour, with speedier resolution increasingly a
CEO of Bats Global Markets, Chris
Concannon, in conversation with FOW this week, confirmed that
Sarao’s alleged activity was a contributing factor
in the firm’s recent push to expedite enforcement
The Bat’s Client Suspension
Rule - which was filed with the SEC in July 2015 - would allow
the group to take swifter action in prohibiting manipulative
behaviour across its exchanges, such as layering and spoofing -
the practice of placing an order with the intent of cancelling
it before it can be completed.
Concannon also called for similar rules to be extended to all
markets and asset classes.
As reported by FOW last month, greater
complexity in the surveillance space is presenting challenges
for trading firms, and opportunities for tech firms that can
Growing demand is also driving creation of
'package offerings’ that encompass
firms’ trading interests to better-meet modern
market surveillance needs.
Michael O’Brien, head of
product management at Nasdaq’s Smarts Trade
Surveillance, told FOW Thursday, "The timing of the Sarao case
and the evidence being led with ties in with the regulatory
focus around order book manipulation and high-order cancel
Impending market abuse regulation in
Europe focuses on unusual cancel rates and order-to-trade
ratios being indicators of market abuse. When looking against
that background, the Sarao evidence can be used as it is
focused on these cancel rates and order to trade ratios, an FOW
"The evidence of this… has
crystallized in the minds of market participants that they need
to have a means to analyse and pull apart the huge amounts of
order data that is coming out of these electronic trading
platforms. And for that reason, there’s more focus
on visualization and dash boards to identify unusual cancel
rates," added O’Brien.
While Sarao’s case has
definitely highlighted the issue, spoofing practices are rife
according to Dan Goldberg, head of business development at
London-based prop trading firm, Futex.
"When you can see someone spoofing the
market, you can try to profit from it but that is very hard. I
hold off… I report it all the time but the problem is
that the exchange has no responsibility to report back its
findings… so you never hear anything more, though once
in a while you’ll hear of someone being pulled up
on it, but that’s probably two years or so after
Concannon from Bats said that such
behaviour has always existed, and the market watches for it,
but the Sarao case has refocused and reminded the market that
enforcement action, at present, cannot be taken swiftly enough,
with its rule set to stop such conduct in a matter of weeks
rather than the years it currently takes to reach a
The trader’s arrest was cited
in the exchange group’s recent filing for approval
of the rule in July. "[BATS]… notes the current criminal
proceedings that have commenced against Navinder Singh Sarao.
Mr. Sarao’s allegedly manipulative trading
activity, which included forms of layering and spoofing in the
futures markets, has been linked as a contributing factor to
the "Flash Crash" of 2010, and yet continued through 2015. The
Exchange believes that the activities described… provide
justification for the [Client Suspension Rule]."
Robert Powell, global head of compliance
and product management at Etrali Trading Solutions, told FOW
that there has been a marked increase in firms’
upping their compliance and supervision technology since the
futures trader was arrested, and the conviction of Tom Hayes
over Libor manipulation earlier this year.
What will be interesting to see if what
– if any – changes exchanges make to prevent
this from happening again, should the case prove that Sarao was
able to cause the market crash, said Powell.
"Where you have groups of people acting as
a firm then the risk that they will cause such an event is
lessened because of the additional controls that are placed
around the trades they do and they have a compliance officer to
guide their behaviour. That's not the case with sole traders
who only have the exchange and the rules to keep them in check.
It's an interesting conundrum."