Navinder Singh Sarao, a London-based trader, was arrested at his home in the United Kingdom on April 21, 2015, and accused by both the US Commodity Futures Trading Commission and the US Department of Justice of engaging in manipulative conduct that contributed to the May 6, 2010, “Flash Crash.” (The Flash Crash refers to events on May 6, 2010, when major US-equities indices in the futures and securities markets suddenly declined 5-6 percent in the afternoon in a few minutes before recovering within a similar short time period.) In a civil lawsuit filed in a US federal court in Chicago on April 17, but made public on April 21, the CFTC charged Mr. Sarao and his trading company, Nav Sarao Futures Limited PLC, with engaging in spoofing and layering activity involving E-mini S&P futures contracts traded on the Chicago Mercantile Exchange for the purpose of disrupting the market in order to facilitate related trading that netted him profits in excess of US $40 million. The alleged wrongful trading occurred between April 2010 and April 2015. Mr. Sarao was also accused of wire and commodities fraud, and manipulation in a criminal complaint in connection with the same activity. This action was filed in a US federal court in Chicago by the Department of Justice on February 11, 2015, and also made public on April 21, shortly after Mr. Sarao was arrested. In its action against Mr. Sarao and his trading company, the CFTC seeks injunctive relief, disgorgement, civil monetary penalties and trading suspensions or ban, among other relief. (Click here for the original full article regarding this matter in the April 22, 2015 edition of Between Bridges.)

My View (new): Since publication of this article originally on April 22, Mr. Sarao has opposed the Department of Justice’s efforts to extradite him from the United Kingdom. The nucleus of Mr. Sarao’s defense to both the Department of Justice’s and the CFTC is likely previewed in a May 29, 2014, email he wrote to the UK Financial Conduct Authority in response to questions they submitted to him (this email is included in the Appendix to the CFTC’s Complaint). There, Mr. Sarao portrayed himself as the victim of manipulative conduct by high-frequency traders (“I don’t like the HFT arena and have complained to the exchange numerous times about their manipulative practices, please BAN IT”), and appeared to justify his layering activity as a defensive effort to facilitate the execution of orders he truly desired filled (“I asked [the company] specifically to help try and hide my orders from these people … I decided that the only way I could mask my orders, was to place them as the market changed price so that they may not be seen in the ‘chaos’ of a price change”). Just a few weeks ago, Michael Coscia failed in his effort to have a federal court in Illinois dismiss his indictment for spoofing on the grounds that the relevant law was void for vagueness and prohibited legitimate market conduct. (Click here for more details in the article, “Alleged Spoofer Fails to Convince Court to Dismiss Indictment” in the April 19, 2015 edition of Bridging the Week.) It appears we will soon see whether other tribunals—including one in the UK—might be more sympathetic to this argument. Also – expect more allegations at least by the CFTC in connection with this matter. In a footnote in its complaint against the defendants, the Commission indicated that the layering examples it has publicized so far “are referenced for illustrative purposes only.” It anticipates supplementing these “as additional information is obtained and analyzed.”