Why Sarao Is The Flash Crash Patsy: He Threatened To Expose The "Mass Manipulation Of High Frequency Nerds"

Tyler Durden's picture

There are several notable items in Bloomberg's comprehensive overnight summary of the epic humiliation America's market regulators are about to undergo, complete with yet another round of theatrical Congressional kangaroo courts, which will lead to a lot of red faces, a wrist slap or two and maybe even the termination of one or two lowly employees and... nothing else.

Because what difference does it make?

At this point only a bottom-up overhaul can "fix" the fragmented, broken market which by definition can only come after the next market crash, one which will promptly be blamed on HFTs (which leaving the central bankers unscathed).

Back to the Bloomberg piece in which we first discover that it wasn't even the CFTC that, 5 years later, "figured out" the flash crash was one person's fault:

When Washington regulators did a five-month autopsy in 2010 of the plunge that briefly erased almost $1 trillion from U.S. stock prices, they didn’t even consider whether it was caused by individuals manipulating the market with fake orders.

 

Their analysis was upended Tuesday with the arrest of Navinder Singh Sarao -- a U.K.-based trader accused by U.S. authorities of abusive algorithmic trading dating back to 2009. Even that action was spurred not by regulators’ own analysis but by that of a whistle-blower who studied the crash, according to Shayne Stevenson, a Seattle lawyer representing the person who reported the conduct.

Your tax money not at work.

But fear not: after today's Deutsche Bank $2.5 billion "get out of jail" card, the CFTC will be $800 million richer and can finally even afford to hire a former trader who has some understanding of how the market works.

* * *

Second, the reason why the SEC wrote a 104-page report with "findings explaining the Flash Crash" which it will have no choice but to retract in light of the latest news and developments, is the following:

Spoofing wasn’t even part of the CFTC’s analysis of the crash, said James Moser, a finance professor at American University who was the agency’s acting chief economist in May 2010. The flash-crash review marked the first time that the agency worked through the CME’s massive order book. CFTC officials often needed to call the exchange for help interpreting the data, he said in an interview.

 

We didn’t look for any sort of spoofing activity,” said Moser, who added that he doubts that Sarao’s activity was the main cause of the crash. “At that point in 2010, that wasn’t high on the radar, at least in our minds.”

So the CME, which is the exchange that trades the E-mini, "concluded within four days of the 2010 flash crash that algorithmic trading on futures exchanges didn’t exacerbate losses in the market," and a few months later, so did the SEC, which instead pinned the entire crash on Waddell & Reed. And the way it did it was by completely ignoring about 99% of all posted quotes: the layered and rapidly canceled trades or what we dubbed "quote stuffing" one whole month after the Flash Crash, in June. In fact we even explained it to anyone who cared to listen: "How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment."

Shockingly, the SEC appeared in front of Congress claiming it has everything under control, when it now admits it never even looked at spoofing.

* * *

But that is nothing compared to the third revelation in the Bloomberg report, namely that the CME had interacted with Sarao, even on the day of the flash crash. The exchange contacted him about his trades after concluding he appeared to be significantly swaying opening prices. The same CME, mind you, which days after the Flash Crash determined that algo trading wasn't the cause of the market crash.

Sarao explained some of his conduct to the CME in a March 2010 e-mail as “just showing a friend of mine what occurs on the bid side of the market almost 24 hours a day, by the high-frequency geeks.”

And the reason why nobody touched Sarao until just days before the 5 years statute of limitations following the Flash Crash had run out, is the following:

He then questioned whether CME’s actions regarding his activity meant the mass manipulation of high frequency nerds is going to end,” according to the U.S. Department of Justice’s complaint released Tuesday.

The answer was no - just his own. And this was his fatal move:

  • SARAO SAID HE TOLD EXCHANGES ABOUT HFT `MANIPULATIVE PRACTICES
  • FLASH-CRASH TRADER SARAO URGED FCA TO BAN HIGH-FREQUENCY TRADES

More from Bloomberg:

Sarao, who goes by Nav, also said his investing style was a reaction to high-frequency traders, who he said could manipulate the market based on his orders without any repercussions. He said his software and his distance from Wall Street made his transactions “miles too slow” to compete with flash traders operating out of the U.S. 

 

“I don’t like the HFT arena and have complained to the exchange numerous times about their manipulative practices, please BAN IT,” Sarao told the FCA in the May 2014 e-mail.

One of his letters to the UK regulator:

Which that is why Sarao became the designated patsy for what is now a market that is manipulated by rogue, parasitic algos beyond recognition: he dared to threaten the status quo.

As for the the market, it is still "mass manipulated by high frequency nerds", and will continue to be, until they themselves become the sacrificial lambs after the next historic market crash.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Callz d Ballz's picture

The truth will get you arrested.

SERReal1's picture

The truth does not matter. Case and point:

The Markets, The Economy, Crude Inventory Build and Record Production, anything Hillary says, does, or has done, Marcro Indicators, etc....

What difference at this point does it really make???

Arius.'s picture
Arius. (not verified) SERReal1 Apr 23, 2015 12:48 PM

i wonder what martin armstrong will have to say about this guy

kliguy38's picture

Armstrong sold out to save his skin....ya can't blame him i guess.....they woulda locked him up for the rest of his life if he didn't narc out

Arius.'s picture
Arius. (not verified) kliguy38 Apr 23, 2015 1:00 PM

i still enoy hearing a good con man ...

Stackers's picture

You guys have to read his letter at the end of this article.... rofl.

He actually atributes his trading style to "quick reflexes" and fast hands. Wow, if only I knew it was so simple.

 

McMolotov's picture

He spent years training with Chinese monks to perfect his technique, much like Bruce Lee.

power steering's picture

Nav Sarao is a fucking superstar and a hero. BTW What law did he break? 

Paveway IV's picture

The same law that Snowden and every other whistleblowers broke: don't expose the psychopaths in charge or you will be destroyed by the machine of terror called the U.S. Government.

That's not a law for TPTB oligarchs, of course - it only applies to us peons.

BurningFuld's picture

Now grasshopper...when you can snatch the trade from my hands it will be time to go.

mkkby's picture

I hear he was at the grassy knoll as well.  HANG HIM from the nearest lamp post.  No bankster ever did anything wrong, and I heart the NSA.

Theosebes Goodfellow's picture

These are the same asshats who think being "in denial" is swimming in a river. There are none so blind as those who will not see.

philipat's picture

IF this ever gets to trial, the discovery process could be very interesting, especially if Eric Hunsader (Nanex) is called upon as an expert witness....However, I doubt it will ever get to trial. They have several years (UK extradition process) to perpetuate the myth that the villain has been caught, then reach a quick plea bargain so that the real facts don't become too public. They still need The Flash Boyz as the scapegoats for the upcoming crash, in which liquidity will be non-existent.

booboo's picture

That is why they have him in a straight jacket in the artist rendition. They were afraid he would feel up the judge without the bailiff knowing.

Whoa Dammit's picture

He messed up the HFTs because he was trading too slow. The big boys expensive algos didn't know how to interpret it.

localsavage's picture

It bet someones ass puckered up when they saw this email / letter.  The BS is getting harder to spew in the intenet age. 

nevadan's picture

Speaking of bullshit.  Assuming a minimum margin of $500/contract he would have to maintain a cool million dollars to trade a 2000 lot emini SP.  Really?  From his parents house?  He probably had a dial up modem too.

NoDebt's picture

Holy shit, I thought this guy was just some random HFT weenie who got scooped up because the case was easy to prove against him.  Now I'm thinking he may have been legitimately trying to help stop it by pointing it out with examples so simple even a CFTC regulator could understand them.

NEVER TRY TO 'HELP" A GOVERNMENT AGENCY.  They'll just assume you did it and arrest you.

Karl-Hungus's picture

It is insane to think it will end well for you these days. Although I know a guy that got away with it. It's a relative of a friend of mine. He finds an old gun, as in beginning of the century, in the effects of a deceased relative, it's an old single shot pistol tht fires .410 shotgun shells, but it had a broken firing pin, so he takes it to a gun smith to see if he can mke a replacement. Gunsmith takes one look at it, says it's classified as a sawed off shotgun, and they are illegal to possess, work on, shoot, etc, without paperwork. So the guy goes home, and CALLS THE FUCKIN ATF and basically tells on himself to see what he can do with the gun. The ATF just told him if he gets the barrel rifled it is legal. Now in a same world , that's how it should be if you find something like that (in a truly same world, I don't think you should need a permission slip to have one of those), but in this country these days, I fully expected him to get hauled off to jail for 10 years on felony charges.

Buckaroo Banzai's picture

If Armstrong "sold out", it was the stupidest sellout in the history of the world. He did seven years in prison! Are you suggesting after seven years it suddenly occurred to him, "Hey! I could just sell out!"

Selling out is what you do to AVOID prison, not spend seven years inside prison.

kchrisc's picture

I have been reading Armstrong's posts on his site for a couple years now, and I am starting to think that he is either a crackpot,, conman, or both.

He often makes strange statements on economics, and then tries to back them up with random and misinterpreted quotes, etc., from history. He doesn't seem to posses or comment from a congruent framework of knowledge, which is a bad sign.

The latest strange post and analysis was this one titled, "Fractional Banking v Matched Funding":
http://armstrongeconomics.com/2015/04/21/fractional-banking-v-matched-fu...

In it, he picks and chooses random events of history that seem to back his premise, but then doesn't go near anything toward the modern age. One of his examples even contradicts the conclusions he draws and states from it. And yet he still summarizes the example as if it supports his conclusions.

And it is not that I often, not always, disagree with him, but that many of his pronouncements and conclusions are way off base, and are not soundly founded or backed.

Of course the tyranny perpetrated against him was wrong, whether he was guilty of the initial charges or not.

Liberty is a demand. Tyranny is submission.

 

I guess we'll see if he is correct come October of this year.

 

Arius.'s picture
Arius. (not verified) kchrisc Apr 23, 2015 1:53 PM

october sept or nov ... it does not really matter ... it is coming.  the greek story is putting people on the crying "wolf" state, plus these groundhougs days of Dow 18000, Nasdaq 5000 show smt big is brewing.

 

my guess about Armstrong, is that he has been on the inside since predicting 87 to the day ... Smt big went down back in late 90s, i think related to the Russian ruble crisis that took down armstrong, and got killed a few other very well connected insiders ... Maxwell, Basra 

KnuckleDragger-X's picture

I just wonder if it will ever go to court since the discovery process could lead to some embaressing things that the powers that be don't want to ever be known....

swmnguy's picture

Is that an air compressor I hear warming up?

Cash Is King's picture

KD-X,

You mean like the ex Goldman guy who "stole" their code, which LB testified in Congress could be used to "manipulate" markets, was given his day in court and now sharing time with Madoff (with the loot)? Oh wait.......

Shop My Bid's picture

That's the point. The truth does not matter. The truth according to these numb nuts is that the market structure is structurally so unsound that some guy in his PJs in his parents basement can singlehandedly manipulate the global markets and by "fixing" the problem by blaming the player and not the game will make us all forget.

F the regulators. The only people who work at the SEC and the other worthless regulators are because they are too stupid to get a job making real cheddar on Wall Street. They will tell you that they work at those places because they feel like they are making a difference by keeping our markets safe and fair for all. More like it's because they got a degree from the University of Phoenix online and the only chance they would ever have seeing the inside walls of a bulge bracket is by getting dressed up once a year to go play Mr. Auditor.

I am not defending Wall Street. But I am more pissed off at the retards at the SEC because we as taxpayers pay these worthless asswipes to fumble around and just make everything worse because they get played by the smarter people sitting across the table from them.

"If you are sitting at a poker table and you look around to try to find the sucker, you're the sucker."

McMolotov's picture

In a time of universal deceit, telling the truth is a revolutionary act.* 

 

*Disclaimer: Side effects may include incarceration or death.

msmith9962's picture

So lying will set you free now?  I'm confused.

raywolf's picture

Spoof Friday...... Spoof the S&P ES contract for Sarao..... add as many bids and asks as your balance will allow... then cancel them.....

sgt_doom's picture

This has got to be the culprit, the doer of evil deeds!

The Lone Trader --- it's always him (or her???) --- it must be the Lone Trader,

or, the Lone Gunman, could be the Lone Gunman posing as the Lone Trader, after all?

ParkAveFlasher's picture

Whistleblowin' scapegoat, ftw!

RaceToTheBottom's picture

Foreigner:  check

Complainer:  check

Not from a TBTF firm: check

Unrelated to real issue: check

 

Proceed with arrest.

NotApplicable's picture

Provided answers in a helpful manner: check

"Anything you say can and will be miscontrued and used against you."

BurningFuld's picture

Also we will wait until the last minute to charge as by the time people sort through our con the statute will be up on the real criminals.  FIVE fucking days!

SillySalesmanQuestion's picture

The "cleaners" must have had the day off...

sgt_doom's picture

Ya know, I'm still trying to figure out if Tom Cain's book, Accident Man, was real or not.

Recently read Killer Elite by Ranulph Fiennes, which is supposed to be nonfiction, and ostensibly sort of validates Cain's (fictional?) book.

The weak point with Fiennes is that he worked for Armand Hammer?

JenkinsLane's picture

"We don't often prosecute people with respect to the financial markets but when we do, we do so very, very selectively."

Weaponized Innocense's picture
Weaponized Innocense (not verified) Apr 23, 2015 12:44 PM

yup....busting him didn't help hide the rigged markets but from those intended to be victims of the fascist markets of deciet.

Bastiat's picture

The market may be manipulated by "nerds" but who do they serve? 

SMG's picture

Same people who control the banks, media, politicians

Luciferian Oligarchs.   Would it be a great day if they and what they had done were to be laid bare for all to see.

sgt_doom's picture

Larry Flynt?  Hugh Hefner?

I dunno, this is a difficult question, or is it a trick question?

Do you mean they may be serving Citadel, Benjy Bernanke's present employer?

Or the Bank for International Settlements?

Or the Group of Thirty?

Or the 5 Richest Families on the Planet?

Or. . .

Jenny McCarthy?

Tell me they don't serve Kim Kardashian or Pia Zadora, for crissakes, not them?!?!?!

sgt_doom's picture

"...but who do they serve? "

Awww. . . give me a hint?

Is the first name begin with. . .

RALPH ???

Atomizer's picture

We've been exposing this from day one. Arrest us cunts. 

Look into that pencil neck geek working for Proctor & Gamble. This happened in 2006. 

Stock Market Crash - Flash Crash May 6, 2010

http://m.youtube.com/watch?v=E1xqSZy9_4I


LawsofPhysics's picture

Truth is always treason in an empire of lies...   duh.

 

Long nailguns.

Grinder74's picture

Idiot.  Never respond to a regulator's "question" (even and especially the "informal" ones) without a lawyer.  I learned that lesson the hard way.  

taketheredpill's picture

 

First time I walked into the basement trading room and saw him I thought he didn't have any hands..they were moving that fast.

 

He could bump into a girl and walk away with her bra...he was that fast.

 

Are the people at the regulators that stupid that 1) they think his algos acted alone or 2) that they can pin this on a single person at a single man shop?  WTF??

 

Arius.'s picture

why not?  i heard it on tv and read it in newspaper ... must be true