Two months ago, nobody had heard of Navinder Sarao. Then, overnight, the gaunt, quiet 36-year old became a global sensation when five years after the historic May 2010 market crash, the US regulators did a 180 an thoroughly revised their "version" of who caused the Flash Crash, and instead of blaming a small mutual fund out of Kansas decided to unleash the wrath of the US justice system on a young trader that until late April had been a complete unknown among Wall Street's power circles.
It all started when Scotland Yard arrived in a house in Hounslow, on the western fringes of London, where Nav Sarao was arrested on one late April morning. Wait, this wasn't some dramatic perp walk out of a glass tower in Canary Wharf? No, for one simple reason: Sarao lived his parents. He also didn't know how to drive.
And so begins one of the most fascinating profiles of a modern day financial mastermind: instead of tailored Saville Row suits, thundering parties, booming Bugattis and the occasional jaunt to the Riviera (or the Hamptons in the case of his US peers), Nav was the antithesis of a Wall Street. He was, in the words of Bloomberg which has created a fascinating profile of the young trading guru, "pathologically frugal" in fact "Sarao was so frugal it was almost an eccentricity."
How was it possible that "a glorified day trader" was "living with his mom and dad near Heathrow Airport."
As Bloomberg reports, "in this post-Madoff era, when giant banks plead guilty to felonies that would put ordinary perps behind bars, Sarao defies nearly everything we’ve come to expect from our financial villains. There was no Alain Ducasse in London, no après ski in Gstaad. Interviews with people who knew or worked with Sarao paint a very different portrait and, in some ways, a stranger one. Many spoke on the condition they not be named to avoid being drawn into the scandal."
The confusion laid out:
Neighbors in the Sikh community where Sarao grew up remember him as nothing special, if they remember him at all. His older brothers followed safe, predictable paths: one became an optician, the other an IT specialist.
Sarao reached for more. Each morning he would awaken in the stucco home where he grew up. His mother would drive him to the train in her old, green Vauxhall Corsa, beyond the sari shops and temples of the neighborhood’s Little India.
But while he came, and lived, in the most modest of surroundings, in his job he was a superstar:
Fifteen miles east, he would step off in the City and into his other life. Beyond St. Paul’s, toward Tower Bridge, he would stroll along Minories street to St. Clare House, take the lift to the fifth floor and drape his leather jacket over the back of his chair. Then he would put on noise-reduction headphones and set to work.
Here at last people noticed him. Everyone at CFT Financials Ltd. had heard about Nav, as they had at Futex Ltd., the small trading firm where he started out. Over time, his ambition curdled toward obsession, even paranoia. He became convinced that his orders were somehow being leaked. But to the mostly male, mostly young screen jockeys trying to scratch out a living in the markets, Sarao was a legend.
“This guy, for want of a better word, had balls,” Miltos Savvidis, a trader at Futex, later recounted to prospective employees. “He used to get into big positions, he saw the risk, he saw the reward, and he took the trades.”
Sarao arrived at Futex as a graduate trainee in 2003 after studying computer science at Brunel University, not far from his home in Hounslow. Futex spots trainees as much as 1 million euros ($1.2 million) in return for a cut of profits and, before long, Sarao was the talk of the trading floor.
How good was he? He would clear GBP500,000, or about $750,000 per week just trading the ES:
While the other traders were eking out 500 pounds ($765) a week, he was clearing 500,000 pounds. He sat by himself, away from the rest. At the end of the day, his colleagues would try to sneak a look at a computer log of everyone’s profits and losses. Sarao was almost always at the top.
It was here that the first glaring contradction emerged: instead of this superstar trading blowing his hard-spoofed money on hookers and coke, Sarao saved it all. Every last penny:
But in a business where money is the ultimate measure, and where success means Bollinger and Beluga, Sarao stood out for another reason: he never seemed to spend much money at all. Paolo Rossi, the founder of Futex, says Sarao was so frugal it was “almost an eccentricity.”
One day Sarao arrived at the office with 100 pounds of new clothes from Sports Direct, a discount chain. When the markets moved against him, he returned his purchases. At the time, he was making about $130,000 on a good day, maybe $70,000 on a mediocre one.
His disdain for material possessions aside, for Sarao only one thing mattered: being the top (carbon-based) trader in town.
“I just want to be the biggest trader,” Sarao told one colleague shortly after starting there.
Futex was small for him, so he decided to become a prop trader: Sarao ended his contract and struck out on his own at CFT Financials, a proprietary trading firm that also rented out space to private traders. He lined up backing and technology support from MF Global Holdings Ltd., the now defunct firm run by former U.S. Senator Jon Corzine.
It was here when Sarao allegedly started his spoofing ways:
The new freedom at CFT also meant a new approach. According to U.S. allegations, it was during those years that Sarao began “a massive effort to manipulate” stock futures on CME Group Inc.’s Globex electronic trading platform.
So yes, Sarao was a terrific trader, and he spoofed which is illegal. But, as we explained since day one: all Sarao did was to compete with the algos: after all spoofing takes place millions and millions of time each day at the millisecond level. Sarao's only real crime is that he left footprints big enough the CFTC and the police could track.
Many traders say spoofing, while illegal, is rampant in today’s high-tech marketplace. Authorities say Sarao developed his computer algorithms in June 2009 to alter how his orders would be perceived by other computers.
What happened next? "Over time, his ambition curdled toward obsession, even paranoia. He became convinced that his orders were somehow being leaked."
The rest of the story is known: as we wrote in late April, "Why Sarao Is The Flash Crash Patsy: He Threatened To Expose The "Mass Manipulation Of High Frequency Nerds."
Where is Sarao now?
Today Nav Sarao sits in a 10-foot-by-six-foot cell at Wandsworth, considered one of the worst prisons in Britain... At “Wanno,” a forbidding Dickensian fortress south of the River Thames, time moves to the same monotonous rhythm: the jangle of guards’ keys at 6:30 a.m.; yard exercise at 8 a.m.; dinner at 4:30 p.m.; lockdown by 8 p.m.
Some other criminals who have resided at Wanno: William Joyce betrayed Britain to the Nazis. Ronnie Kray ruled the ganglands of the East End. Bruce Reynolds masterminded the Great Train Robbery.
And that, dear readers, is what passes for "justice" in the New Normal.