It is hard to imagine a person more poorly suited to his environment, more destined for disaster, than Navinder Singh Sarao. Five years ago the mathematical prodigy turned trader, cheeky schoolboy turned supposed master criminal, contrived to have himself hunted down by the FBI for crashing the US stock market — all from a computer in his bedroom in his parental home under a flight path in drab London suburbia.
Sarao’s actions led to him being sentenced earlier this year to a year of home incarceration. How he got there, and averted a much longer spell in prison, is the subject of Liam Vaughan’s book, Flash Crash. It is a cautionary tale of the fragilities baked into the financial system by layers of complexity and beggar-thy-neighbour profit hunting. It is an engaging history lesson on the evolution of modern trading, the conflicting demands it seeks to serve, and its dislocation from any social purpose. It is an alarming insight into the motivations of prosecutors who are, at times, desperate just to see someone, anyone, pay. And it is a pacy account that swings from humour to horror of a vulnerable man who is out of his depth and failed by the people around him.
Sarao shot into the public eye aged 36 in April 2015, when he was hauled out of his baffled parents’ house in Hounslow under arrest for his involvement in a head-spinning crash in US stocks in 2010 that caused the Dow Jones Industrial Average to fall further, in just five minutes, than it had ever done before in its 114-year history. The crash came immediately after Sarao had snapped up a $900,000 profit by stuffing the market with billions of dollars of fake orders. Trouble hit when he switched off his machines, possibly because his mum had called him downstairs for dinner.
The incident stunned regulators, investors and traders around the world into taking high-speed automated trading seriously. The integrity of markets was at stake. Suddenly, the humdrum world of Nav Sarao was a matter for the White House.
But the sight of a skinny, badly dressed Sarao, hauled up on charges befitting of a Bond villain and carrying a potential 380-year sentence, was greeted by scepticism and alarm by the media. Even some of the people involved in bringing the case against him are uncomfortable with it, particularly when they encounter his unique strangeness in real life. As became clear only late into Sarao’s legal process, he suffers from Asperger’s syndrome — a condition that leaves him blind to the broader consequences of his actions and plainly too fragile for prison.
Vaughan, a journalist for Bloomberg, describes how behind Sarao’s shambolic exterior is a man who possesses near-incomprehensible mathematical abilities, an aggressively foul mouth, particularly in online forums, a fondness for conspiracy theories, and a fortune worth tens of millions of dollars amassed through his trading. His parents had no clue, but unscrupulous entrepreneurs were only too happy to relieve him of his fortune.
He can crunch numbers and spot patterns that are beyond the rest of us. But he cannot see the peril in telling regulators to “kiss my ass” or threatening to “cut their fucking thumbs off”.
Flash Crash captures Sarao’s almost otherworldly oddness without crossing the line into poking fun at him. The trader is depicted guzzling milk at his desk, and asking his FBI interrogators if they have ever hunted down a serial killer, seemingly unable to understand how much trouble he was in.
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Vaughan recounts how Sarao once found himself on the other side of trades executed by Société Générale’s infamous rogue trader Jérôme Kerviel. The Frenchman’s loss was, in part, his gain, after a shrewd piece of pattern-spotting and patience by Sarao that helped propel him in to the big time in his community of independent traders. He became infuriated with the high-speed traders who were scuffing up his more slow-moving, point-and-click trading style, and fatefully decided that if he could not beat them he would join them. Whether he was truly to blame for the 2010 crash will remain a point of debate. Yes, he was firing off spoof orders — he pleaded guilty to that and to fraud. But he was far from the only spoofer in town. And he was not involved in the market at the time of the crash itself. He ends up helping regulators and prosecutors to understand this world better than ever before.
Flash Crash is a compelling reminder that such cases could happen again without scrutiny around who gets their hands on markets weaponry. Ironically, one thing stopping them now is Sarao himself.
Katie Martin is the FT’s markets editor
Flash Crash: A Trading Savant, a Global Manhunt and the Most Mysterious Market Crash in History, by Liam Vaughan, Doubleday $26.95/ William Collins £20, 272 Pages
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