'Flash Crash' trader to appear in London court

A British trader accused of contributing to a US stock market crash and fraudulently making $40 million in high-frequency trading from his modest London home was due to appear in court on Wednesday.

Navinder Singh Sarao, 36, was arrested by British police on Tuesday on an extradition warrant issued by the US authorities, which  accuse him of an elaborate scheme using automated software on the futures market.

US justice officials allege that his trades contributed to the May 2010 "Flash Crash", when US stocks plunged 600 points in five minutes.

Over five years until April 2014, Sarao allegedly made $40 million (37 million euros) from his high-frequency trading on the Chicago Mercantile Exchange (CME).

His company, Nav Sarao Futures Ltd, is headquartered in a suburban house in Hounslow, west London, which is reportedly also his family's home.

The US Department of Justice accuses Sarao of placing orders for futures contracts -- agreements to buy or sell a specific product or financial instrument in the future -- before cancelling them abruptly.

The goal of the practice -- known as "spoofing" -- is to manipulate the market price, which the trader can then exploit by simultaneously executing other, real trades using automated trading software.
Sarao was trading on a leading futures market, the E-Mini Standard & Poor's 500 futures contracts, which is linked to the Standard & Poor's 500 index of leading shares.

He was allegedly highly active on the market in the period leading up to the "Flash Crash" on May 6, 2010, when the Dow Jones Industrial Average fell by about 600 points in a five-minute span after a big drop in the price of E-Minis.

The US authorities are requesting Sarao's extradition from Britain to face one charge of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of "spoofing".

"Sarao's alleged manipulation earned him significant profits and contributed to a major drop in the US stock market on May 6, 2010, that came to be known as the 'Flash Crash'," the US Department of Justice said in a statement.

- 'Kiss my ass' -

Sarao was challenged on numerous occasions in 2009 and 2010 by US and European authorities over what the charge sheet said was his "suspicious activity".

In various responses, he acknowledged that he frequently cancelled large orders but denied he was using automated trading software, but was doing it all manually.

The Chicago exchange contacted him in March 2009, and again in 2010, about his activities before the market opened.

Responding to his commodity broker, who acted as an intermediary, Sarao said he had called the exchange "and told 'em to kiss my ass", the US documents show.

He was also challenged by the exchange about another incident where he placed and cancelled a large number of orders within seconds.

Sarao claimed that he "was just showing a friend of mine what occurs on the bid side of the market almost 24 hours a day, by the high frequency geeks", the documents show.

His trading activity was also challenged by Eurex, a German derivatives exchange, and Britain's Financial Conduct Authority, but each time he denied using automated software.

According to British media reports, Sarao still lives at home with his family in the semi-detached house in Hounslow.

His father, Nachhattar Singh Sarao, was quoted in The Times newspaper as saying that he knew nothing of the allegations.

"All this is news to me. What you're telling me is as much a surprise to me," he said.

Asked about the nature of his son's work, he said: "I don’t know about computers."