Nav Sarao: Scapegoat of 2010 Flash Crash

Charts, Commentary, Our View, S&P 500, The Opening Print


Our S&P futures desk that started in 1985 was not part of the brokers groups that controlled the S&P pit. We did not trade our own accounts because we always put the customers first. On May 6, 2010, our desk lost 5.3mil dollars in 20 minutes. For any agency to blame this mishap on a single trader is a travesty both for the futures traders that risk their hard-earned money in the markets every day and the industry as a whole. With algorithmic and program trading making up 80% of the daily volumes, how can Nav Sarao be “the guy”?

Nearly five years after the Flash Crash, the CFTC/DOJ/FBI have come to the conclusion that it didn’t have anything to do with some of the largest algorithmic trading firms in the world. It had nothing to do with KCG, Jump Trading, Optiver, IMC Financial Markets, Tower Research (Spire Europe), Citadel Tactical Trading, Hudson River Trading, Virtu Financial, Tradebot Systems, Sun Trading, Spot Trading, Two Sigma Investments, Flow Traders, Renaissance Technologies, or RSJ Algorithmic Trading, but that it all comes down to one trader in London by the name of Nav Sarao. I think it’s fair to say that the average futures trader that puts his money at risk every day in the futures markets knows that there is a high level of algorithmic and program trading going on, but most do not understand that, unlike in the past, most movement was due to supply and demand, an economic report or some type of event. That’s not how it works today, and that’s not how it worked on May 6, 2010, during the Flash Crash.

Flash Crash Fall Guy



When it was first reported that Nav had been arrested, and long before Bloomberg and Zero Hedge started reporting all the ins and outs, I said right away: “Five years later? One guy? Total scapegoat!” Because MrTopStep deals with a lot of individual and prop traders, we actually have a trader in our trading room that not only knows Nav but traded next to him. So I asked James H to write down his thoughts about the timing and the arrest of Nav Sarao:

“During the time we shared common premises, I knew Nav to be a quiet and unassuming trader, sitting at his corner desk during U.S. trading hours, glued to his screens wearing oversized earphones that seemed almost to cover his whole head. He was self-backed, clearing via a now failed counterparty. Even then, it was known that he was scalping by placing outsized limit orders outside of the bid/offer spread to “encourage” the market towards his bona-fide (but much, much smaller) limit orders to help him capture the spread. But he was far from the algorithmic master that some people would have you believe. He traded manually by mouse, cancelling his outsized bids and offers when the market got close to him. Undoubtedly he unintentionally got filled on some of those at times, prompting him to attempt to automate the process and minimise the chance of being stuck with larger positions. At that point, and well before the Flash Crash, he went to trade from home. His trading was no more complex than say, trading pair trades using an auto-spreader. While spoofing is certainly a form of market abuse, I fail to see the difference between his actions and those I currently see executed in any of the heavily traded futures contracts today by some algorithmic participants. The technological knowledge of these participants eclipses Nav’s in the same way as the Starship Enterprise does with someone with a bow and arrow. Should Nav lose his case against him (which is beginning to look flimsy) then the rest of the HFT world might start to feel more than a little nervous… There is a strong sense over here that he has been made a scapegoat, and that the officials haven’t properly thought this one – and the potential consequences – through.”

It’s hard for me, a guy that started as a runner making 65 bucks a week in the grain room, being pushed around on the floor for years, working as hard as I did and going on to build one of the world’s largest CME S&P 500 futures operations, to have a 35-year career come to a demise because of the Flash Crash. I have seen a lot of things during my nearly 39 years on the floor, big hits and big losses, but none like the $5.3 million hit we took that day. As floor traders we understand the risk and we prepare for it, but we were not prepared for what was going to unfold on that fatal day back on May 6, 2010. It defies belief that Nav should be singled out in an arena that includes some of the largest investment and banking firms in the world, like Goldman Sachs, or algorithmic trader Citadel Investment, or even Jump Trading. You see, long before Nav there were thousands of servers hooked up to the CME. Virtue is not the only firm that has “never” had a losing day. There are small unheard-of firms in Chicago that clear through Advantage Futures that also clear accounts that never lose.

CME faces scrutiny over warning signs on ‘flash crash trader’

In the end, like MF Global, someone has to pass the buck. It’s not the CME’s fault and the CFTC has no way to audit high-frequency trading. The way I see it is if you let someone stay at your house and you show them how to turn on the alarm system so the house doesn’t get robbed, and he forgets and the house gets robbed, whose fault is it? It’s your friend’s fault. Or when you bank at Chase and they say they will guarantee the safety of your funds, if they get robbed, your funds are safe. But in the high-flying world of algorithmic trading, it’s important for the exchanges not to blame their biggest customers or for that matter to admit that they left the door open.

The Asian markets closed mostly lower ( Shanghai Composite +3.08%, Hang Seng +1.33%) and in Europe 10 out of 12 markets quoted are trading higher. This week’s economic and earnings schedule includes 20 separate economic releases, 11 T-bill or T-bond auctions or announcements, 3 Federal Reserve bank presidents speaking and the two-day FOMC meeting. Today’s economic calendar starts with the PMI Services flash, Dallas Fed Mfg Survey, 2-year note auction and earnings from Apple (AAPL), Laboratory Corp. of America Holdings (LH), Crane Co. (CR), C.H. Robinson Worldwide (CHRW), and a whole lot more …

Our View: There is a slight pickup in economic reports and a ton of earnings releases this week. There are four trading days left in April and the first day of May falls on Friday. Based on it being the final days of the month and the first trading day of the new month this week, I tend to think we could be in for higher prices throughout the week. Friday’s volume was only 950,000 including Globex and Mondays tend to be the lowest volume day of the week, so it’s very possible thin-to-win plays out again. We reached my 2114; now the question is, can the ESM hit my 2120-2122 this week? My guess is yes. Let’s face it, folks, the S&P futures are expanding its range and right now that expansion is on the upside.

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 6 out of 11 markets closed lower: Shanghai Comp. +3.04%, Hang Seng +1.33%, Nikkei -0.18%
  • In Europe 10 of 12 markets are trading higher: DAX +0.98%, FTSE +0.55%, MICEX +0.72%, GD.AT +1.11% (at 5:00 am CT)
  • Fair value: S&P -6.67, Nasdaq -8.49, Dow -78.51
  • Total volume: LOW 954k ESM and 2.2k SPM traded
  • Economic Schedule: PMI Services Flash, Dallas Fed Mfg Survey, 2-year note auction.
(Visited 208 times, 1 visits today)

Leave a Reply