"Crash Boys" - Michael Lewis Slays The Regulators In The Sarao Scapegoating Debacle

Tyler Durden's picture

By Michael Lewis, originally posted in Bloomberg

Crash Boys

The first question that arises from the Commodity Futures Trading Commission’s case against Navinder Singh Sarao is: Why did it take them five years to bring it?

A guy living with his parents next to London's Heathrow Airport enters a lot of big, phony orders to sell U.S. stock market futures; the market promptly collapses on May 6, 2010; it takes five years for the army of U.S. financial regulators to work out that there might be some connection between the two events. It makes no sense.

A bunch of news reports have suggested that the CFTC didn’t have the information available to it to make the case. After the flash crash, the commission focused exclusively on trades that had occurred that day, rather than orders designed not to trade -- at least until some mysterious whistle-blower came forward to explain how the futures market actually worked. But this can’t be true.

Immediately after the flash crash, Eric Hunsader, founder of the Chicago-based market data company Nanex, which has access to all stock and futures market orders, detected lots of socially dubious trading activity that May day: high-frequency trading firms sending 5,000 quotes per second in a single stock without ever intending to trade that stock, for instance. On June 18, 2010, Nanex published a report of its findings.

The following Wednesday, June 23, the website Zero Hedge posted the Nanex report. Two days later the CFTC’s chief economist, Andrei Kirilenko, e-mailed Hunsader. “He invited me out to D.C. and I talked with everyone there (and I mean everyone -- including a commissioner),” Hunsader says. “The CFTC then flew out a programmer to our offices where we showed him how to work with our data. Took all of a day. We sent him back with our flash crash data, and that was pretty much the last we heard about that project.”

In October 2010, Hunsader was still poring over data from the flash crash. “Between October 7 and October 14, I noticed Sarao’s spoofing,” he says. Hunsader assumed it to be the work of an algorithm of some large high-frequency trading firm -- as this sort of deception had become common practice for big HFT firms. He told the CFTC about it in a phone call -- but that they hadn’t discovered it already for themselves surprised him.

“It’s important to know the CFTC had our data, and the ability to use it in August 2010,” Hunsader says. “We were focused on stocks (the CFTC does futures), so they should have seen it right away.”

Which raises another obvious question: If you are going to sit on this information for five years, why not sit on it forever? The people at the CFTC who decided to come forth, five years after the fact, with this new and improved explanation for the flash crash, must have known they would be creating a controversy with themselves at the center of it. It’s actually sort of brave of them.

They’ve been ridiculed in the news media and will no doubt soon be hauled before various congressional committees. They’ll have annoyed their colleagues at the Securities and Exchange Commission, who now look like even greater fools than they did before, for not bothering to mention in their report on the crash the various nefarious activities of algorithmic traders, and instead offering up as the primary cause of the crash a stupid mistake made by a money manager in Kansas. The authors of the SEC report either consciously ignored or did not bother to acquire from the CFTC a lot of accessible, and damning, information about what was happening in the U.S. stock markets the day of the flash crash. The world will now want to know why they did this. (And why we should not instantly listen to Paul Volcker and fold these two regulators into one.)

But it’s unfair to dwell too long on the regulators. Financial regulators, like editorial writers, are at best the markets’ last line of defense; they are less inclined to join any battle than they are to wander in afterward and shoot the wounded.

Traders who seek to manipulate the U.S. stock market are meant to encounter resistance from the market itself. During the flash crash, Navinder Sarao apparently used Jon Corzine’s now defunct MF Global to place orders and clear trades. Why didn’t MF Global see what he was up to, or at least call him to ask him about it? There’s now a big business on Wall Street of firms renting out their HFT infrastructure to prop shops. Does that business depend on the brokers paying no attention to what their customers are doing? Do the big Wall Street firms that rent out their technology bear any responsibility for what their customers do with the weapons they've been given? For that matter, why don’t U.S. securities exchanges assume any responsibility for what happens on them?

Sarao’s manipulative orders were placed on the Chicago Mercantile Exchange. Why didn’t the CME notice what was going on? Or did they notice, and simply not care, as the behavior was standard practice for their high-frequency trading clients?

Then there is the biggest question of all: How can a guy working from his parents’ house in suburban England whose only actionable orders were to BUY stock market futures cause such a sensational collapse in U.S. stocks? On the day of the flash crash, Sarao never actually sold stocks. He was trying to trick the market into falling so that he could buy in more cheaply. But whom did he fool with his trick? Whose algorithms were so easily gamed that they responded to phony sell orders by creating a crash? Stupidity isn’t a crime. Still, it would be interesting to know who, at this particular poker table, on this particular day, was the fool.

It would also be interesting to know how it occurred to Sarao that his trick might work. There’s a fabulous yet-to-be-told story here, about a smart kid in the U.K. who somehow figures out that the machines that execute the stock market trades of others might be gamed -- and so he games them. One day while he is busy trying to trick the U.S. stock market into falling, the market collapses, more sensationally than it has ever collapsed. And instead of digging some hole in Hounslow in which he might hide for a decade or so, or fleeing to Anguilla, where he has squirreled away his profits, he stays in his parents’ home and keeps right on spoofing the U.S. stock market -- and then is shocked when people turn up to accuse him of wrongdoing. He’s not some kind of exception to the standard operating procedure in finance. He’s a parody of it.

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MFL8240's picture

The market is that fragile that one individual can crash it?  Bullshit!

Troy Ounce's picture



Companies are individuals now.

Headbanger's picture

But it's gotta make us wonder.

When will these "den of thieves" start to mistrust each other in this bullshit ""market"" they created?

It won't end well once they start killing each other to get out.

VinceFostersGhost's picture





What Regulators?

Urban Roman's picture

He found a 2400 baud dialup line in his cell.

Hooked up an 80386 machine found on the junk heap, and thats how he still does it.

See how sneaky and evil he is?

Squid-puppets a-go-go's picture

he did it with a commodore 64 and just spammed the Commodore button

Oh regional Indian's picture

sPoof......and it's all gone.

Too many Indians in the news nowadays, but India not so much. Hmmmm.....

Thought Processor's picture


Ok, the question of "why wait five years" to bring this case in at the last moment?


Let me take a stab at this one-  in legal cases involving 'cases that are in need of a resolution (or scapegoat)' but are sensitive for one reason or another (corruption, or for political reasons, etc), it is strategically beneficial to wait until the last minute to bring said harmless scapegoat to court just under the statute of limitiations.  For two primary reasons:

1.  It allows one party to be accused and tried (scapegoated) for said crime within the allowed statute of limitiations.  Chosing a harmless scapegoat can minimize any fallout to interested parties.

2.  It allows all other parties involved to be 'unofficially' absolved of any wrongdoing after the statute of limitations is up.  


The above is important in any case that has significant pressure to reach an end point or resolution due to public interest or blatent evidence of wrongdoing by the parties involved.  The prosecution, having been corrupted, will opt for the scapegoating a harmless party just before the statute closes while allowing the others to lapse, thereby absolving them of any wrondoing.

In short, it's a complete sham.


Welcome to the world we live in.

N2OJoe's picture

The simple answer is sometimes the right one. They know the big crash is coming and they want to get people used to the idea that one  poor bastard in some other country can be the SOLE cause. This was the easiest donkey to pin the tail on and they needed it pinned before the statute ran out.

power steering's picture

Nev Sarao is a fucking hero and has broken no law!

Hype Alert's picture

When whistleblowers like Sarao and Snowden are the scapegoats and Hillary is a serious contender for the WH, corruption is so systemic there are some serious problems.


Jon Corzine anyone?

SoilMyselfRotten's picture

Dude, we elected the son/grandson of a known Nazi sympathizer and may elect another grandkid....you think we just became corrupt?

Tarzan's picture

Dude, there's nothing to watch on TV about Nazi sympathizers running Washington so how would the voter know?  Americans are clueless about recent history, let alone 3 generations ago because they don't read, they watch.....

and if the press where still free to report such facts the Bush family wouldn't be able to run for dog catcher......

Besides, haven't you got the memo, History has been revised. The Nazi's got a bad rap, they where just gathering Jews to give them a bath..... I know, I read it in the comments at ZeroHedge.

TheReplacement's picture

Read?  In the 80s I read every single book in the school and town libraries about WWII.  I'd never heard of the Prescot Bush supporting Hitler thing until a few years ago in the comments section of ZH.  I'll give long odds that you can go to any major bookstore and the town library and NOT find any book that mentions it.

If you don't already know about something you are not going to find it except by random accident.




Tarzan's picture

Well, if your still digging books out of the library I would agree, good luck finding anything on that subject in a public library.  Not that it's not there...  any subject like this requires reading from sources outside the main stream American press.  You have to read the papers and news outlets in other countries like the British press when your interested in dirt on US politicians.

I first read about it a couple years ago on sgtreport.com and found there's plenty to read about Mr Prescott if you simply Google it.  But point is, there was a day when a man that wanted to be President was vetted by the press in this country and the people actually read the news, now the foreign press fills that roll, somewhat, but the people don't read news, they watch carefully crafted sound bites.

How Bush's grandfather helped Hitler's rise to power
NoVa's picture

Scapegoat derives from the common English translation of the Hebrew term azazel (Hebrew: ?????) which occurs in Leviticus 16:8.  

And Aaron shall place lots upon the two he goats: one lot "For the Lord," and the other lot, "For Azazel."

In ancient Greece a cripple or beggar or criminal (the pharmakos) was cast out of the community, either in response to a natural disaster (such as a plague, famine or an invasion) or in response to a calendrical crisis (such as the end of the year). In the Bible, the goat for Azazel was a goat that was designated (Hebrew ??????????? la-aza'zeyl) to be outcast in the desert as part of the ceremonies of the Day of Atonement, that began during the Exodus with the original Tabernacle and continued through the times of the temples in Jerusalem.

The word now refers to someone who is unfairly blamed by others for problems.

steelhead23's picture

Sarao was trying his best to be discreet.  He very much did not blow the whistle.  Instead, he flagrantly fouled the market.  But, he did alert everyone to the insane instability in a market that is more of a betting parlor than a medium for capital exchange.  This system is insanely fragile - and yet, it is a store of wealth for many.  Where Sarao may be a bit of a hero is his unveiling of this fact - and the anal puckering he's inflicting on the 1%.  I would bet that most of the larger HFT firms have modified their algos so they don't try to catch falling knives.

FrankDrakman's picture

Agree, but he'd still better be careful. Do they sell nail guns in England?

RaceToTheBottom's picture

Metric nails hurt as much as non metric nails....

BoingBoing's picture

Isn't Sarao expressing his first amendment rights by spending money to buy shares?

dumdum's picture



Agreed, markets are not that fragile. There is more to that Flash Crash than meets the eye.

Unfortunately for him, this kid was just acting illegally at the wrong time.

falak pema's picture

lol, brilliant as usual !

I'm sure that this spoof trader will make a fortune writing about how he beat the HFTs and goofed the CFTC.

bobson's picture

It's interesting timing. I think TPTB want to set a precendent that one person can cause this kind of damage (flash crash). In my opinion, this is a pre-cursor for a future real crash which will be blamed on one person or a small group of people vs. the current broken system. 

Pseudolus's picture

That was my gut feeling too. I can only think of two reasons this would be pursued

1. Anchor sentiment/Influence Perception

2. Serve Justice

So only one then :-)


junction's picture

Sarao crashed the stock market, 7 World Trade Center fell down on its own, Obama doesn't work for the CIA, the SEC isn't run by the NWO, Lt. Col. Pete Raffa of the Ohio Air National Guard, who shot down Flight 93 on 9/11 against orders, died of a natural heart attack on December 2, 2001. . .the list of lies goes on.

Cognitive Dissonance's picture

"The first question that arises from the Commodity Futures Trading Commission’s case against Navinder Singh Sarao is: Why did it take them five years to bring it?"

This is like asking why clowns wear big floppy shoes. Because it would have been embarrassing if they had waited six?

Arius.'s picture

or seven, or eight, or ... ?

Or because everything is coming to ahead? 


on other news, another groundhog day ... Dow 18000, Nas 5000, greek crisis ...


got tired of crying wolf ... might as well wait for armstrong's day of doom


New Kid's picture

Because they wanted to delay it as long as possible but not so long that the statute of limitations kicks in. This way they have a scapegoat but the real criminals are not in any danger now.

ekm1's picture

UK again.

Bearn stearns and lehmans both collapsed in UK first

Arius.'s picture

AIG most famously with london based genius derivatives trader

Blopper's picture

The SEC, CFTC, and CME are practicing cronyism.

VinceFostersGhost's picture



It's not like they're not doing their jobs. They DID take down Martha Stewart.


All the while they let every Tom, Dick, and Harry go absolutely nuts.

DeadFred's picture

I do not thank you for the visual imagery of someone taking down Martha Stewart.

Blopper's picture

Martha Stewart was not a HFT market maker.

NotApplicable's picture

Nor was she an insider. Her mistake was the same as Sarao's, making public statements.

Bro of the Sorrowful Figure's picture

kangaroo courts in banana republics. this is what we've come to. the regulated own the regulators, why would we expect anything else.

Fun Facts's picture

The CFTC is wholly corrupt and in the pocket of the too big to jails.

matagorda's picture

This would imply that all the investment in HFT hardware can be beaten by a guy with a dialup modem in england.  Very interesting.

Cognitive Dissonance's picture

....in his parents basement no less, a critical contributing factor to his dastardly deeds.

nevadan's picture

And what sort of margin account must he have had to do 2000 lot emini sp's?  Some kid with that kind of money trading from his parents house?  Color me dubious.

williambanzai7's picture

The kid is 36 which is practically middle aged in the trading business.

nevadan's picture

So stictly speaking he is not a kid.  I still have trouble with the idea that someone in the suburbs is doing trades that amount to $25k/tick.  I can't image a intraday margin requirement for someone like that at less than $500/contract.  This amounts to 1 million dollars for the 2000 lot trades that is claimed and then he is using 100% of his margin with no cushion.  His broker is going to stand by while this goes on?  The whole thing seems preposterous on its face.

williambanzai7's picture

I know it sounds ridiculous, but then again there are many things about London that are in fact ridiculous. It certainly makes an entertaining movie script.

PirateOfBaltimore's picture

MF Global hooked him up with some of their other client's money.

world_debt_slave's picture

his future looks bright on Wall Street

madbraz's picture



All roads here would lead to places they absolutely cannot allow us to go and discover the truth.


Think for a second which high institution would love to have a (criminal) weapon that allows them to "influence" (manipulate) asset prices higher at any given moment and perhaps even create price movements at their will.


They helped create it, that's my guess.  The evidence is crystal clear.  They've perfected it since 2012 and look at the market since then, no dips.  Those early years before that it was being tested and crashes were the way to work out the kinks.


matagorda's picture

If the cftc had just watched this video on the daily show years ago would've saved them a lot of trouble -- http://thedailyshow.cc.com/videos/sffbil/cash-cow---high-frequency-tradi...

J J Pettigrew's picture

Remember when they went after Mark Cuban.....for insider trading?

THe one thing for certain is that the SEC and the CFTC will not find anyone in the industry doing something wrong...that would ruin SEC and CFTC lawyers career paths

Instead they find Mark Cuban (charges dropped) and a kid in a bedroom in UK...

Cant find the mainframes parked next to / in the exchanges and find out who they are connected to....

Far be it for them to find a Goldman Sachs or Citadel f*****g with the market....

thegazzman's picture

we spoofed some folks