Navinder Sarao: the incredible story of the man who made Wall Street lose $ 1 billion from his room

Navinder Sarao caused a resounding fall in the US stock markets without leaving his home in London

The former stock trader Navinder Sarao He was sentenced to one year of house arrest for helping to cause a resounding collapse of the stock markets of US $ 1 billion.

Nicknamed the “Hounslow Hound”, in an ironic reference to the famous swindler of the movie “Wolf of Wall Street”, the British received clemency from a judge in Chicago, United States, due to the extraordinary circumstances of his case.

But who is he and how did he help the markets fall more than 6,000 kilometers away?

At 42, Navinder Sarao is a self-taught bag operator which contributed to panic in US markets in 2010 from a room in his parents’ house in London.

He was arrested in 2015 for his participation in a “sudden crash” of the bags. In this case, the crash lasted less than an hour, eliminating almost $ 1 billion in shares before the markets recovered.

Sarao then spent four months in Wandsworth Prison before being extradited to the United States. Unusually, he was allowed to return to the United Kingdom before sentencing, where he has been helping authorities catch other stock scammers.

Extremely intelligent, Sarao has the Asperger syndrome (an autism spectrum disorder), a condition that according to his lawyers made him see his intervention in the markets as if it were “winning a video game.”

Despite his cinematographic nickname, the truth is that his life could not have been more different than that of the protagonist of the “Wolf of Wall Street” played by Leonardo DiCaprio in the 2013 film.

He did not make ostentatious purchases and ended up losing a large amount of his money to fraudulent investors.

How did you earn $ 40 million from your room?

Sarao was part of his fortune by artificially manipulating the stock market to earn money.

For that, he used software specially adapted to operate remotely in the Chicago Mercantile Index. He bought and sold contracts that speculated on the value of the main American companies.

In that stock index, each time a purchase or sale order was made, the “high frequency operators” (many of them not human, but computers that executed algorithms) tried to make their own millisecond transactions before those orders could be executed .

That way, they could be the first to make money with market changes.

Sarao realized that all high frequency operators used similar software, making the market move in the same direction, as if it were a flock of sheep.

His software took advantage of this by placing thousands of orders before canceling or changing them quickly, once he had created a artificial demand for others to buy or sell that asset.

This practice, known as “spoofing“(referring to creating the illusion of a trend) allowed him to make real purchase or sale orders for profit, as the price rose or fell rapidly.

By faking a trend, it made the market move in one direction, just to make the “hound” disappear, nibble on the back of the package and make a quick profit, leaving high-frequency operators with nothing.

In 2016, Sarao agreed to pay the U.S. government. US $ 12.8 million, the amount that prosecutors said they earned as a result of their illegal operations.

In total, it is believed that he made a profit of approximately US $40 million in the span of five years.

What was your sentence?

Sarao pleaded guilty to a charge for electronic fraud and a charge for “spoofing,” an activity that is illegal in the United States.

He initially faced 22 charges, which involved a maximum sentence of 380 years.

But prosecutors finally decided not to seek a jail sentence, as Sarao did not spend money on luxuries and quickly lost his earnings on scams he was a victim of.

Too they took their autism into account, the time he had already spent in jail and his collaboration with the government for several years.

How common is this type of crime?

Most countries, including the United Kingdom, do not mention spoofing – a fairly common activity – as a crime.

It has only been illegal in the US since 2010 and the first successful case was that filed against the American merchant Michael Coscia in 2013.

Coscia was sentenced to three years in prison for handle markets of futures using a computer program specially designed for that purpose, which allowed it to obtain estimated earnings of US $ 1.6 million.

More recently, UBS, Deutsche Bank and HSBC banks collectively paid US $ 46.6 million to US regulators to reach an agreement against claims of spoofing.

These cases expose the sometimes blurred distinction between legal and illegal market manipulation.

After all, the job of a stockbroker is to exploit the wrong prices in the markets. This is how they earn money.

In addition, the algorithmic trade in itself is not illegal: It is an increasingly common practice in the markets when you place a large volume of bets, as it allows you to move faster than a human.

(Adaptation of an article written by BBC business reporters Andy Verity Y Eleanor Lawrie).

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