Photo by Luke MacGregor/Bloomberg
On March 9, 2020, U.S. stocks had their biggest one-day point drop ever as the economic fallout from the novel coronavirus sank in. Within a week that record had been broken twice, only for the S&P 500 to register its greatest weekly gain in decades in April, after the Federal Reserve intervened by slashing interest rates and buying bonds.
This rattle of volatility arrives 10 years after another famously tumultuous episode in the markets—the so-called Flash Crash of May 6, 2010, when, without warning, the S&P 500 plummeted 5% in four minutes, temporarily erasing $1 trillion. The incident sparked a government investigation and led to questions about whether the rise of high-frequency trading was having a destabilizing impact on the markets. In the end, the U.S. Department of Justice focused on a different culprit: a 36-year-old day trader named Navinder Singh Sarao who operated out of his bedroom in his parents’ suburban semidetached house on the outskirts of London.
With no ties to the world of high finance, Sarao accumulated $70 million buying and selling futures as if he were playing a computer game. The bulk of his winnings came during periods of extreme volatility. He also manipulated the markets, according to the U.S. government, creating a computer program that placed then canceled huge volumes of orders to deceive other participants about supply and demand—a brand-new offense known as “spoofing.” Authorities were careful to assert that Sarao’s antics had only contributed to the crash, essentially by creating false signals others reacted to, but that nuance was lost in the ensuing press coverage.
In 2016, Sarao struck a plea deal with U.S. authorities, agreeing to tell the authorities everything he knew in exchange for a more lenient sentence. The information he provided on the dark arts of electronic trading proved so useful that the government incorporated it into its detection software, helping to lead to spoofing convictions for more than a dozen traders from banks, hedge funds, and high-frequency trading firms. In recognition of his cooperation and a diagnosis of Asperger’s, Sarao was spared jail in January, sentenced instead to a year under house arrest—a month before the entire world went into lockdown. More painful for him, Sarao was also banned from trading during the kind of wildly careening markets he relished. This is the story of how Sarao first discovered his knack for playing that game.
“Wanted. Trainee Futures Traders,” ran the small ad in the Tuesday edition of the Evening Standard. “Applications are invited from graduates who can demonstrate the following skills: highly motivated; analytical approach; disciplined; goal orientated; work well under pressure.”
Sarao was two years out of university when he sent his résumé to Futex, a small trading arcade with an office in the suburbs, about 45 minutes by train from London’s financial district. After graduating he’d spent a miserable slog doing telephone sales, then taken an admin job on the foreign exchange desk at Bank of America. By the time Futex invited him to the commuter town of Weybridge for an interview, he was unemployed and restless.
Nav, as everyone called him, might not have known it yet, but he was uniquely well-suited to the job. When he was 3 years old he learned his multiplication tables after stumbling on a Little Professor electronic game. By the time he got to school he could multiply longer numbers in his head. While other children scrawled their workings on a piece of paper, Nav found he could hold each step, naturally and easily, in his brain. He picked up A’s and B’s without trying but made sure nobody mistook him for a teacher’s pet. He played practical jokes and rarely showed up on time. His tutor recalled “a very likable young man, very intelligent,” who was “full of fun.”
In 1998, Sarao briefly left home to attend Brunel, a mid-tier university, where he studied computer science and math. He and his friends were broke, but one of their housemates always seemed to have cash. One day, Sarao asked him how he could afford such expensive clothes. “Trading,” came the reply. The dot-com bubble was in full swing. How hard could it be, thought Sarao. He started scouring the internet for stock tips and plowing through textbooks on financial theory.
Futex’s office was above a Waitrose supermarket. To gain entry, visitors had to walk around the back of the store and up a staircase. The décor was drab, the equipment was dated, and it overlooked a parking lot. The company was one of a burgeoning number of arcades, or “prop shops,” that sprung up in Britain and the U.S. when trading migrated from physical “pits,” with their hand signals and colorful jackets, to computer screens. The business model was straightforward and, for a while at least, highly lucrative. Futex would take on a bunch of wannabe traders and teach them the skills they needed to succeed in the markets. Those who thrived were backed with steadily larger sums, while those who failed were cut. Futex made money by taking a share of its traders’ profits and a commission on every trade.
For a generation of ambitious graduates brought up watching films such as Wall Street and Trading Places but lacking the grades or connections to land a job at JPMorgan, the opportunity was irresistible. The best day traders, they were told in a rousing speech on arrival at Futex, could make their own hours, wear flip-flops to work, and still pull in footballer money. All they had to do was correctly predict whether the market would go up or down more often than they were wrong, and they would be rich and free. The reality, of course, was that it was extremely difficult to consistently beat the market after costs.
During the recruitment process, Sarao impressed the bosses by answering the mental arithmetic questions faster than they could finish looking them up on a calculator. But he failed to make much of an impression during the interview. Stick-thin and shifty, he arrived late wearing a suit that looked suspiciously like it belonged to somebody else. He refused to make eye contact and started sentences with “mate” and “bruv.” Still, he showed signs of potential. Sarao was a keen gamer, ranking in the top 700 of 3 million players globally at the soccer computer game FIFA, which required focus and hand-eye coordination. And he was confident to an almost comical degree. When he was asked what he hoped to achieve in his career, he replied, straight-faced, that he wanted to be as rich as Warren Buffett and start his own charity. In the end, he made the cut.
Everyone knew not to disturb Sarao when he was trading. For eight hours a day he sat at a lone desk at the far end of the trading floor, his face inches from his screens, in what appeared to be a catatonic state. To block out the world, he wore a pair of red, heavy-duty ear defenders of the type favored by road workers. He didn’t communicate with anyone. Only his fingers moved.
When it came to trading futures, Sarao’s hyperfocus was a gift. Three years after joining Futex he predominantly traded the S&P 500 “e-mini,” a futures contract that tracks the fortunes of America’s largest companies. It’s basically a very quick way to make bets on the direction of stocks without the trouble of having to own any.
Like most traders at Futex, Sarao had little interest in the outlook for corporate America, per se. He’d never visited the country, and he preferred reading soccer websites to the Wall Street Journal. He wasn’t an investor like Warren Buffett, seeking out undervalued companies by scouring financial reports, and he wasn’t an economics expert. Sarao was what’s commonly referred to as a “scalper,” a trader who notches up small wins and positions himself to clean up should there be a big swing one way or the other. At the end of almost every session, he made sure he had no outstanding positions.
The single most important thing on Sarao’s screens was a display called the ladder, which shows trades occurring and orders entering and leaving the market in real time. It looks like an Excel spreadsheet with three columns whose contents are constantly shifting. The central column contains 20 price levels, ordered from high to low. Next to each level is a figure showing the number of orders waiting “in the queue” to trade at that level. The ladder provides an indispensable window into a market’s supply and demand at any given moment.
Staring at numbers and charts on a screen all day might sound dull, but the ladder can become highly addictive—a vast, confounding, ever-changing, zero-sum game played against some of the sharpest minds in the world for potentially limitless rewards. Every win releases a dopamine rush. Every loss is a blow. Adrenaline and cortisol course through the veins.
Scalpers analyze the ladder for clues as to whether prices will rise or fall. To take the most basic example, if the total number of offers to sell significantly outweighs the number of bids, supply would seem to outstrip demand, and it might be reasonable to conclude the price will go down. But there’s also the question of who placed the orders and why. An international pension fund executing a billion-dollar transaction, for example, will have a more significant impact on prices than a bunch of speculative scalpers. Electronic trading is anonymous, but good traders are able to build a sense of whom they’re up against and react accordingly.
With his left hand hovering over his keyboard and his right hand on the mouse, Sarao bought and sold futures at an astounding rate. “I know it sounds ridiculous, but he was like one of the robots in Westworld or Neo from The Matrix or something,” recalls Leif Cid, who spent time at Futex in 2007 and 2008.
Sarao’s swashbuckling exploits in the market stood out because they were so at odds with the way he lived his life. He barely withdrew anything from his trading account to live on, preferring to let it accumulate like a high score. He’d long ago ditched his ill-fitting work attire in favor of tracksuit pants and cheap sweaters that he wore for days on end. For lunch, or, more accurately, dinner, he ate supermarket sandwiches or a Filet-O-Fish from McDonald’s. He barely drank, didn’t smoke, had no love life to speak of, and when the rest of the office decamped to O’Neill’s pub every Friday, he stayed behind to continue trading.
The closest thing to a bible for the traders at Futex was Reminiscences of a Stock Operator by Edwin Lefèvre. Published in 1923, it recounts the early life and wisdom of Jesse Livermore, an American trading guru who went from watching prices on a bucket shop ticker tape at 14 to making and losing a fortune many times over. It was said that Livermore could “read the tape”—that is, he could look at price movements in a security or future and accurately predict where it was heading based on his careful study of past behavior.
Sarao may not have reached the same heights as Livermore, and his lifestyle was certainly more abstemious than that of the freewheeling, three-times-married playboy, but years later, his peers at Futex would point out some striking parallels. Both started out with nothing on the fringes of finance and had photographic memories; both could divorce emotion from their decisions and were willing to risk ruin for a shot at glory; both prided themselves on the conviction of their calls and hated discussing trading with anyone else lest their instincts be contaminated.
They would both also end up inextricably linked to market crashes. Livermore, who earned $100 million shorting stocks in 1929—the equivalent of more than $1 billion today—ended up squandering it all and shooting himself in the head in the cloakroom of the Sherry-Netherland Hotel in Manhattan in 1940. For those paying attention, Livermore’s life is a cautionary tale about the dangers of blind obsession and the perils of tying your destiny too tightly to the whims of the market. The traders at Futex only ever talked about his legendary skills.
As time went on, even the most skillful humans would find it harder to profit from reading the ladder. The computerized high-frequency traders coming into the market were too fast. It was then that Sarao, who left Futex to trade from home, would turn his skills to gaming the game itself.
Excerpted from Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History, by Liam Vaughan, published by Doubleday on May 12, 2020.