‘Flash crash’ trader whose bogus deals helped wipe US$1trillion off markets, pleads guilty in US

A London-based trader on Wednesday became the second person convicted of criminally spoofing US futures markets, after he pleaded guilty to federal charges that he contributed to Wall Street’s 2010 “flash crash” by using the manipulative trading practice.

Navinder Sarao, 37, who traded on the Chicago Mercantile Exchange from his parents’ suburban home near London’s Heathrow Airport, pleaded guilty to one count each of spoofing and wire fraud as part of an agreement with US prosecutors. Spoofing is the use of fake orders to manipulate prices.

Separately, the US Commodity Futures Trading Commission said it was seeking more than US$38 million in monetary sanctions from Sarao and a permanent trading ban against him as part of the deal.

Wearing an orange penal jumpsuit during his first appearance in a US court, Sarao acknowledged that he would pay the US government US$12.9 million he earned in profits from illegal trading. He told US District Court Judge Virginia Kendall that he understood the terms of the plea deal.

Kendall said sentencing guidelines call for him to be jailed for 78 to 97 months. The maximum possible jail term for the crimes is 30 years.

Prosecutors alleged that Sarao used a modified computer program to “spoof” E-mini S&P 500 futures by generating large sell orders that pushed down prices. He then cancelled the trades and bought the contracts at the lower prices, they said.

Prosecutors said his actions contributed to market instability that led to the flash crash on May 6, 2010, when the Dow Jones industrial average briefly plunged more than 1,000 points, temporarily wiping out nearly US$1 trillion in market value.