To Prevail, Feds Must Prove Nav Sarao's Trading Intentions

In the case of Nav Sarao, the alleged flash crash trader arrested April 21, the prosecution will likely focus on the defendant’s intent.

Institutional Investor

May 1, 2015


By Robert Stowe England


What did the alleged flash crash trader Navinder (Nav) Singh Sarao intend when he placed thousands of orders on volatile trading days to buy or sell S&P 500 futures contracts, or E-minis, on the Chicago Mercantile Exchange? Did the 36-year-old London resident intend to create an artificial price? Did he intend to cancel his trades before they were executed? Did he intend to defraud? Those are the questions prosecutors must answer if they wish to convict Sarao on criminal charges.

“The case will be completely about his intent, and I think many people are interested to see if the government can prove what was in the mind of Mr. Sarao,” says Clifford Histed, partner at K&L Gates in Chicago and former supervisory federal prosecutor and supervisory enforcement lawyer at the Commodity Futures Trading Commission (CFTC).


Sarao became an instant media sensation April 21 when he was arrested in London by Scotland Yard. He then appeared in court in London and, if the U.S. Department of Justice is to have its way, is to be extradited to the U.S. on criminal violations of the Commodity Exchange Act.


The charges include commodity fraud, market manipulation, attempted market manipulation, wire fraud and spoofing (placing orders on an exchange with the intention of cancelling them before they are executed). Spoofing was defined and made a statutory violation in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.


Sarao is charged in both criminal and civil complaints with placing multiple large orders on the Chicago Mercantile Exchange to give a false impression of market depth in S&P 500 E-minis. The Feds argue he used off-the-shelf futures trading software to layer, or place multiple orders for, hundreds of contracts at prices three or four ticks away from the market price at the time. Those orders tricked other traders into believing there was genuine demand, prompting them to execute trades that moved the price artificially higher or lower, according to authorities. The layering program modified orders constantly, keeping offers three or four ticks away from the market price to prevent trade execution. Further charges allege that Sarao modified the trading software to automatically cancel orders if prices moved so fast it risked a trade execution.

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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