Flash Crash

by Liam Vaughan

  IXE also claimed to be regulated: the reality was more nuanced. Under Swiss law, financial intermediaries are given the choice of either registering with FINMA or becoming a member of one of a handful of authorised ‘self-regulatory organisations’. After agreeing to pay an annual fee of $2,400 and attend some compliance classes, IXE opted for the latter.

  The investigator had found a 2010 legal complaint: Bank of Mongolia v. M&P Global Financial Services Europe, AG, GT International Holdings Inc., Burton Greenberg et al., Second Amended Complaint, US District Court for the Southern District of Florida, 31 March 2010.

  who would later serve an eight-year stretch: ‘Florida Man Sentenced to Eight Years in Prison For Investment Fraud Conspiracy’, US Attorney’s Office, Northern District of New York, 19 February 2016, www.justice.gov.

  he signed off on the transfer of $17 million: appendix to the CFTC’s Motion for a Statutory Restraining Order, Northern District of Illinois, 17 April 2015.

  they were now receiving a residual $500,000 a year: between them, Nav’s introducers actually received around $750,000 a year, but Paul James, the accountant, also took a slice.

  Shortly after Nav made his first deposit: ‘EU Imposes New Sanctions on Iran’, BBC, 15 October 2012.

  Garcia was invited to join the board of the Swiss arm: listing for Robert F. Kennedy Foundation, www.business-monitor.ch.

  ‘Switzerland’s most important farmer has an urban workplace’: Markus Stadeli, ‘Mexikanische Grossgrund-besitzer ziehen in die Schweiz’, Neue Zurcher Zeitung, 3 November 2013. This translation from the original German-language article was carried out by IXE and published on IXE’s website.

  Garcia was invited onto Al Jazeera, CNBC and Bloomberg: the interviews were available on the ‘Publications’ page of IXE’s website, www.ixe-group.com.

  one publication estimated Garcia’s worth at 250 million Swiss francs: Stefan Luscher, ‘Familie Garcia Alvarez: Superkorn fur Bolivien’, Bilanz, 1 April 2014.

  ‘Our fathers’ businesses and deals were based on a handshake’: Fuchs, ‘Interviews’, www.moneycab.com, 18 September 2013.

  CHAPTER 17: MR X

  He’d read about how nine stock traders: ‘Finra Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy’, 13 September 2010, www.finra.org.

  A preliminary version of the report states: ‘Preliminary Findings’, CFTC and SEC, 18 May 2010, www.sec.gov.

  whose $2 billion of profits in 2011: the CME’s net income was $1.8 billion in 2011. The CFTC’s annual budget was around $200 million.

  As Mr X considered his next move: Scott Patterson and Jenny Strasburg, ‘For Superfast Stock Traders, a Way to Jump Ahead in Line’, Wall Street Journal, 19 September 2012.

  full negative alpha: alpha is trader-speak for a strategy’s ability to beat the market, or its ‘edge’.

  Bodek started using Hide Not Slide orders and his profits improved: Patterson and Strasburg, ‘For Superfast Stock Traders’.

  Bodek, who eschewed his right to anonymity, now stood to receive: Bodek’s complaint resulted in the SEC levying a $14 million fine against the BATS exchange in January 2015, of which he received 25 per cent. Today, he works with prospective whistle-blowers looking to bring claims under the Dodd-Frank Whistleblower Program via his company Decimus Capital Markets, LLC.

  CHAPTER 18: NAVSAR

  In the twelve days the CFTC ended up selecting: report by CFTC expert witness Terrence Hendershott of the Hass School of Business at the University of California, Berkeley. Contained in the appendix to the CFTC’s Motion for a Statutory Restraining Order, 17 April 2015.

  On the day of the crash, the layering algo accounted: DOJ Sarao complaint, 21 April 2015, www.justice.gov.

  CHAPTER 19: CORNBREAD AND THE CME

  ‘Lol, guarantee if I switch on my computer’: DOJ indictment, 2 September 2015, www.justice.gov.

  The first iteration: William C. Braman, Mark Mendelson et al. v. The CME Group, Inc. and the Board of Trade of the City of Chicago, US District Court of the Northern District of Illinois, Eastern Division, 11 April 2014.

  ‘The suit is devoid of any facts supporting the allegations’: CME Group statement, 13 April 2014, www.cmegroup.com.

  The previous month: Michael Lewis, Flash Boys: A Wall Street Revolt (New York: W. W. Norton & Company, 2014).

  ‘The US stock market was now a class system’: Michael Lewis, ‘The Wolf Hunters of Wall Street (an adaptation from Flash Boys)’, New York Times Magazine, 31 March 2014.

  insider trading 2.0: Eric Schneiderman, ‘Cracking Down on Insider Trading 2.0’, Albany Business Review, 11 October 2013.

  Joseph Stiglitz, the Nobel Prize-winning economist: Joseph E. Stiglitz, ‘Tapping the Brakes: Are Less Active Markets Safer and Better for the Economy?’, presented at the Federal Reserve Bank of America, 15 April 2014.

  Charlie Munger, Warren Buffett’s right-hand man: Alex Crippen, ‘Buffett, Gates and Munger Criticize High-Frequency Trading’, cnbc.com, 5 May 2014.

  in May the CME filed a motion: CME Group Motion to Dismiss, Braman et al. v. The CME Group, 31 May 2014.

  The bedrock of the amended complaint: Scott Patterson, Jenny Strasburg, and Liam Pleven, ‘High-Speed Traders Exploit Loophole’, Wall Street Journal, 1 May 2013.

  just one losing day out of 1,238: Virtu Financial Inc. IPO prospectus, filed with the SEC on 26 March 2014, www.sec.gov.

  CME Group promised to try to minimise: Jenny Strasburg and Scott Patterson, ‘Exchange Vows to Trim Data Loophole’, Wall Street Journal, 1 May 2013.

  Citing confidential witnesses: Braman et al. v. The CME Group, Second Amended Class Action Complaint, 22 July 2014.

  The CME maintained that the deals were essential: Matthew Leising, ‘Perks Live Forever at CME Amid Review of Trade Incentives’, Bloomberg, 14 June 2014. The article reported that perks for some early firms were ten times greater than for new entrants in Eurodollar futures, one of the CME’s highest volume contracts.

  by 2013 it had become widespread enough: Ann Saphir, ‘US Regulators Examining “Wash Trades”, CFTC’s Chilton Says’, Reuters, 18 March 2013.

  an estimated ninety-five out of every one hundred: this estimate was provided by Larry Harris, University of Southern California professor and former chief economist at the SEC, during Sarao’s February 2016 extradition hearing. The CME declined to provide figures.

  ‘Over the past decade’: Braman v. CME Group, Amended Complaint, 22 July 2014.

  and on 29 May, in lieu of an interview: this email is included in the appendix to the CFTC’s Motion for a Statutory Restraining Order, 17 April 2015.

  hard to square with the reality: CFTC Sarao complaint, 21 April 2015, www.cftc.gov.

  Nav couldn’t resist crowing: although, as ever, Sarao didn’t actually know who he was trading against.

  CHAPTER 20: MINDGAMES

  To help cut through the noise: Jeff Le Riche also engaged a firm called Analysis Group to expedite the gathering and processing of data – something that, until then, had been largely handled by Harris alone.

  The professor examined Sarao’s use of the algo: Hendershott’s report, Appendix to the CFTC’s Motion for a Statutory Restraining Order, 17 April 2015.

  ‘the layering algorithm …’: Emphasis added.

  an agent in Chicago: the FBI’s point man on the Sarao case was special agent Greg LaBerta.

  Martin Davie, the irascible Scotsman running things: Davie resigned from the other company, Willowind, in March 2014.

  ‘Financial markets are on the news’: Pitching document titled ‘iconic Bet: The Next Generation of Online Gaming’, 12 October 2014.

  He had also attracted some big names: the company’s chairman was Sir David Michels, who was previously CEO of the Hilton Group as well as chairman of Ladbrokes. High Court judge Sir Robin Jacob was also on the board.

  At the time, the enforcement division was working on a fai
rly typical case: ‘CFTC Charges Florida Residents Anthony J. Klatch II and Lindsey Heim, along with Their Company Assurance Capital Management, LLC, with Fraud and Misappropriation’, 27 January 2017, www.cftc.gov.

  Inside, they presented a judge: USA v. Navinder Singh Sarao, Criminal Complaint, filed under seal on 11 February 2015, www.justice.gov.

  Ever since Jesus Alejandro Garcia Alvarez appeared: Ingo Malcher, ‘Bezahlt wurde noch nicht’, Brand Eins, October 2016.

  four hundred bank branches: ‘Bankenplatz Zurich’, Zahlen und Fakten, Ausgabe 2017/2018. According to the report, there are 536 branches in the canton of Zurich, of which the majority are based in the city itself.

  Arner had been struck low: Guy Dinmore, ‘State TV Discloses Berlusconi Bank Deposits’, Financial Times, 16 November 2009. The article cites claims about Arner’s ties to Berlusconi first made in the Italian documentary show Report.

  Garcia purchased a 9.8 per cent stake: ‘IXE Group acquires BANCA ARNER’, 16 December 2014, www.legal-monitor.com.

  He also found a new chairman: ‘Michael Baer Nuovo Presidente Di Banca Arner SA’, 7 January 2015, formerly available on Arner Bank’s website, www.arnerbank.ch. (In April 2019, Arner merged with Geneva Swiss Bank to form a new entity, ONE Swiss Bank.)

  Rather than everyone having their own individual accounts: the information in this section is taken from internal IXE documents and interviews with multiple direct witnesses. IXE Group and Alejandro Garcia declined to comment.

  would receive even more interest: where previously IXE paid investors interest on a per centage of their total deposit – usually 85 or 90 per cent – it was now offering to pay them on the full amount.

  CHAPTER 21: WHERE’S THE MONEY, NAV?

  ‘Nav was always going to be the kind of person’: ‘Flash Crash Trader “Potentially Legendary”: Rossi’, Bloomberg, 24 April 2015.

  Wandsworth houses roughly 1,700 inmates: Wandsworth Prison information, www.justice.gov.uk.

  Nav’s funds were subject to strict lock-up clauses: Nav had also signed up to a multiyear currency swap that guaranteed his interest payments would be exchanged from dollars to pounds at an agreed exchange rate each quarter.

  One of his favourites was The Celestine Prophecy: James Redfield, The Celestine Prophecy (New York: Hachette Book Group, first self-published in 1993).

  The judge was unmoved: Sarao v. United States of America, England and Wales High Court, 20 May 2015.

  A 2015 study by the University of Cambridge: ‘Study of Half a Million People Reveals Sex and Job Predict How Many Autistic Traits You Have’, 3 November 2015, www.cam.ac.uk.

  The CFTC agreed: CFTC v. Nav Sarao Futures Plc and Navinder Singh Sarao, Consent Order of the Preliminary Injunction and Other Ancillary Relief in Resolution of Plaintiff’s Motion for Statutory Restraining Order, Preliminary Injunction and Other Equitable Relief, 29 June 2015.

  a sixty-second action-movie-style advertisement: ‘Iconic Faceoff – Commercial with Conor McGregor 60 sec’, YouTube, 10 July 2015.

  A month after the bout: Iconic Worldwide Gaming Limited was placed into administration on 15 January 2016.

  CHAPTER 22: #FREENAV

  ‘The simple idea that a chap in West London’: Paul Murphy, ‘Saving Trader Sarao’, Financial Times, 22 April 2015.

  the New York Times published an op-ed: Rajiv Sethi, ‘The Trader as Scapegoat’, New York Times, 28 April 2015.

  In Bloomberg, Michael Lewis questioned: Michael Lewis, ‘Crash Boys: How Did a Kid from Hounslow Grow Up to Cause a Crash?’ Bloomberg, 24 April 2015.

  particularly since the ‘disruptive trading’ provision: the relevant amendments to the Commodity Exchange Act became effective on 16 July 2011.

  The DOJ’s indictment stated: USA v. Navinder Singh Sarao, DOJ Indictment, 2 September 2015.

  However, all those layers of nuance were lost: ‘Futures Trader Charged with Illegally Manipulating Stock Market, Contributing to the May 2010 Market “Flash Crash”’, Justice Department press release, 21 April 2015.

  Speaking to the Wall Street Journal: Bradley Hope and Andrew Ackerman, ‘ “Flash Crash” Investigators Likely Missed Clues’, Wall Street Journal, 26 April 2015.

  the trader’s program was switched off: Tim Cave, Juliet Samuel and Aruna Viswanatha, ‘UK “Flash Crash” Trader Navinder Sarao Fighting Extradition to US Granted Bail’, Wall Street Journal, 22 April 2015.

  We ‘should have seen this’: Hope and Ackerman, ‘ “Flash Crash” Investigators’.

  ‘Yes, Sarao’s conduct was dodgy’: Craig Pirrong, ‘A Matter of Magnitudes: Making Matterhorn Out of a Molehill’, Streetwise Professor, 24 April 2015, www.streetwiseprofessor.com.

  After analysing e-mini and SPY trading data: Eric Aldrich, Joseph Grundfest and Gregory Laughlin, ‘The Flash Crash: A New Deconstruction’, 25 January 2016. Aldrich is at the Department of Economics, University of California, Santa Cruz; Grundfest is at the School of Law, Stanford University; Laughlin is in the Department of Astronomy and Astrophysics at the University of California, Santa Cruz.

  ‘A front-runner profits by gleaning the intentions’: John Arnold, ‘Spoofers Keep Markets Honest’, Bloomberg, 23 January 2015.

  ‘gross misuse of the term’: ‘Spoofing Corrupts Markets: A Reply to John Arnold’, Mechanical Markets, 12 April 2015.

  CHAPTER 23: ALL IS LOST

  That faith was tested on 2 September: USA v. Sarao indictment, 2 September 2015, www.justice.gov.

  ‘If I am short I want to spoof it down’: USA v. Sarao indictment, 2 September 2015, www.justice.gov.

  was charged by the CFTC with spoofing: ‘CFTC Charges Chicago Trader Igor B. Oystacher and His Proprietary Trading Company, 3 Red Trading LLC, with Spoofing and Employment of a Manipulative and Deceptive Device’, 19 October 2015, www.cftc.gov.

  in the case of Oystacher: although, unlike Sarao, Oystacher was never criminally charged. The DOJ looked into the case but ultimately decided not to bring charges, to the chagrin of some CFTC enforcement staff.

  Oystacher’s MO: US CFTC v. Igor B. Oystacher and 3Red Trading LLC, complaint, 19 October 2015, www.cftc.gov.

  An affidavit written by the CFTC: despite the crossover, CFTC management decided to keep the investigations into Sarao and Oystacher largely separate to minimise the risk of tipping off one of the defendants.

  The defendant, who was also charged with commodities fraud: ‘High-Frequency Trader Indicted for Manipulating Commodities Futures Markets in First Federal Prosecution for “Spoofing”’, 2 October 2014, www.justice.gov.

  was a barrel-chested, fifty-three-year-old former pit trader: Brian Lois, Annie Massa and Janan Hanna, ‘From Pits to Algos, an Old-School Trader Makes Leap to Spoofing’, Bloomberg, 12 November 2015.

  ‘pump the market’: this email was presented as evidence during the trial. The coder, Jeremiah Park, was cross-examined about it on day three, according to court transcripts.

  Coscia hired a Murderers’ Row: the team from Sullivan & Cromwell included Steven Peikin, the current cohead of enforcement at the SEC, Kenneth Raisler, the CFTC’s former general counsel, and Karen P. Seymour, who prosecuted Martha Stewart while at the Southern District of New York. She is now Goldman Sachs’s general counsel.

  agreed to pay fines of more than $3 million: on 22 July 2013, Coscia was simultaneously fined $1.4 million by the CFTC, $800,000 by the CME, and $900,000 by the UK’s Financial Conduct Authority.

  ‘I’m not dealing hot dogs, I’m dealing futures!’: Kim Janssen, ‘Spoofing Trial Gets Testy as Defendant Faces Questioning’, Chicago Tribune, 1 November 2015.

  ‘You know, it reminds me of something’: Coscia trial transcripts, day 7.

  He was later sentenced: ‘High-Frequency Trader Sentenced to Three Years in Prison for Disrupting Futures Market in First Federal Prosecution of “Spoofing”’, 12 July 2016, www.justice.gov.

  ‘This Court’s task is not to adjudicate’: Braman v. CME Group Inc., Memorandum Opinion and Order, United States District
Judge John Robert Blakey, 3 December 2015.

  is governed by a treaty: The UK–US extradition treaty of 2003.

  There is a list of possible objections: they are laid out in the Extradition Act of 2003.

  Lord Baker, who led the review, concluded it was: ‘A Review of the United Kingdom’s Extradition Arrangements’, the Right Honourable Sir Scott Baker, 30 September 2011.

  David Gilmour, Chrissie Hynde and Bob Geldof: the song, released in 2009, was a rerecording of Graham Nash’s ‘Chicago’.

  The case might have provided a useful precedent: Theresa May statement on Gary MacKinnon extradition, 16 October 2012, www.gov.uk.

  Arguing on Nav’s behalf was Lewis: in 2007, for example, Lewis convinced the High Court to block the extradition of hotel magnate and alleged fraudster Stanley Tollman to the United States so he could care for his sick wife.

  ‘The key question for this court is whether’: Suzi Ring, ‘Spoofing Isn’t a UK Crime, Attorney Says in Sarao Case’, Bloomberg, 5 February 2016.

  economist who wrote a book called: Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners (Oxford: Oxford University Press, 2002).

  ‘characterises these orders as being bogus’: Submission by Sarao’s lawyers, Government of the United States of America v. Navinder Singh Sarao, February 2016.

  Britain’s financial regulator had fined a Swiss hedge fund: ‘FCA Secures High Court Judgment Awarding Injunction and over £7 Million in Penalties Against Five Defendants for Market Abuse’, 12 August 2015, www.fca.org.uk.

  treated for post-traumatic stress disorder: David Hellier, ‘“Flash Crash” Hearing Told Spoofing Does Not Justify Trader’s Extradition to US’, Guardian, 5 February 2016.

  ‘It was American individuals’: Suzi Ring, ‘Flash Crash Trader Headed to US After Losing Final Appeal’, Bloomberg, 14 October 2016.

  Seven weeks after the hearing: Ruling of District Judge Purdy, USA v. Navinder Singh Sarao, 23 March 2016, www.judiciary.uk.

  CHAPTER 24: COME TO JESUS

  In August 2016, the German business magazine: Ingo Malcher, ‘Bezahlt wurde noch nicht’, Brand Eins, October 2016.