Known as the ‘Hound of Hounslow’, Navinder Singh Sarao was accused of manipulating the market from his bedroom. Due to the trading size, US regulators believed they were going after a criminal mastermind working at a large trading firm or bank.
Little did they know, they were chasing a lone trader, living at home in a working class area. Navinder had allegedly made $70 million trading yet still lived a modest lifestyle and his parents were completely unaware. A genius kid, born on the wrong side of the tracks, rebelling against the establishment.
Navinder had a gift for numbers and possessed a photographic memory. After university, he worked for Futex – a small prop firm located above a supermarket on the outskirts of London. He was perfect for the role as Navinder had a background in gaming and was able to spend hours staring at a screen, analysing market data.
Fast forward a few years and he became an enigmatic figure at Futex, all the younger traders idolized him. He was earning huge money but still maintained a humble persona. Naturally a loner, he couldn’t stand the noise of chatter about the latest market moves. Navinder moved himself to a separate desk and sat wearing ear defenders to block out disruption.
He specialized in trading E-minis, which are future contracts that essentially track the S&P 500. Sarao spent thousands of hours studying the market and developed a freakish ability to predict market movements. He left Futex during the 2008 financial crisis and by this time had accumulated $2 million.
The financial markets at this time were scary. Large financial institutions were on the verge of collapse and governments were looking to take action. Navinder took this opportunity and placed a large trade hoping governments would intervene and stock prices would recover. He timed the trade beautifully, buying on a Friday and the following Monday the US government bailed out the market. Stock prices recovered 19%, netting him a huge gain – $2 million turned into $11 million!
Overtime Navinder began to get frustrated with the arrival of high frequency traders in the market as they were impacting his success. HFT firms were front running orders and scalping retail traders like him.
He made a decision to fight back against HFT firms and hired a software developer to build a trading software to spoof orders. The algorithm worked perfectly and Navinder was able to move the market from his bedroom in whatever direction he wanted. In the days leading up to the crash he scored some huge 6 figure paydays!
Navinder only used the software in short bursts at a time but that was all he needed to confuse high frequency traders. The software would pump out sell orders to drive the market lower but the orders would later be cancelled before they were executed.
On the day of the 2010 flash crash it got to a point where his software was pumping out $200 million worth of sell orders. This was a once in a lifetime opportunity and he banked serious profits, making $950,000 on the day of the flash crash. A historic day on Wall Street, over a 30 minute spell a trillion dollars was wiped off the value of companies.
The markets bounced back and US regulators started looking into the cause of the collapse. A few months later regulators published a report sharing what happened but there was no reference to any manipulation. It turns out a US pension fund placed a big non-price sensitive sell order into a falling market and that was enough to cause havoc.
Funnily enough it was another trader who noticed all strange blocks of orders that were cancelled during the flash crash and blew the whistle to the CFTC. After a year, the CFTC became certain they identified genuine manipulation. They got the Department of Justice involved and in February 2015, a judge signed an arrest warrant for Navinder.
On the morning of the arrest half a dozen police officers, two prosecutors from the DOJ and two FBI agents showed up at Navinder’s house. A sleepy Navinder strolled downstairs looking confused, he had no idea what was happening.
The DOJ had 22 criminal counts against him and was facing life in prison. Considering how much Navinder earned through trading, the judge set bail at £5 million but he didn’t post bail. His lawyers started contacting his investment advisors but they couldn’t get the money.
Navinder had naively invested capital with some sketchy individuals. Around $65 million was handed over to a Mexican entrepreneur named Jesus – guaranteeing him 11% per year. It turned out Jesus lost all the money, whoops!
The UK judge wanted to extradite him to the U.S. but Navinder’s lawyer struck a deal with the DOJ. It turns out he was very helpful to the DOJ and opened their eyes to how traders were abusing the market. They also felt sorry for him, a young vulnerable guy with Asperger’s who had lost all of the money. In the end, Navinder was let off with time served and was placed under house arrest for a year. With a coronavirus lockdown shortly ensuing, Navinder’s timing was impeccable!
Navinder Singh Sarao at his peak had a net worth of $70 million but is currently worth £1,000. Sadly Navinder is pretty much penniless and I doubt he cares, money never meant anything to him. Trading was a game and money was just a way of keeping score. Now 42, Navinder is back living his old life, like nothing ever happened. Let’s hope one day when it all blows over he has millions stashed away in an offshore bank account!