A younger Navinder Sarao, the 36-year-old UK day trader facing extradition to the US for his alleged role in 2010’s flash crash, was a quiet man and a whizz at maths as a student, according to his neighbours.
Anil Puri, a childhood friend, said Sarao was a “bright kid” and “definitely had a good future”.
Many of Sarao’s childhood pals still live in the same Hounslow neighbourhood where they grew up. Their particular street is predominantly Indian, and one resident described the community as “tight knit.”
Most of the houses are nearly identical, and the street lies directly beneath the flight paths of Heathrow planes.
It is a respectable neighbourhood, but not a place one might expect a multi-million pound trader to choose to stay in.
Sarao, in fact, no longer appears to permanently reside in the area, though much of his family does.
The house in which he was arrested on Tuesday is his parents’, and across the street lives his older brother.
Many of his neighbours have not seen Sarao in years. Puri began noticing Sarao’s absence from the neighbourhood in the “mid to early nineties,” he said.
“I’ve not seen him around,” another neighbour and childhood friend said. “Last time I saw him was '94.”
Another local, a taxi driver and a friend of Sarao’s father Nachhattar, remembers driving Sarao to work several times.
He dropped him off in front of a “big computer company in Woking,” though he cannot recall which company it was or whether Sarao was employed there.
He, too, said Sarao had been absent, though not as far back as the 1990s.
Despite Sarao’s fading from community life, those who played sport in the street with him as a child were quite surprised by the turn of events.
“Quiet guy, he was,” one friend said. “Lovely, lovely gentleman.”
Q&A: SARAO CASE: SPOOFING, LAYERING, AND E-MINIS
What is “spoofing”?
Spoofing is a regulatory definition which describes a practice where a trader makes false buy or sell requests which they later withdraw. This tricks traders into thinking there are huge levels of offers looking to buy or sell shares.
What is “layering”?
Layering is a type of spoofing. It is the practice Navinder Sarao is accused of using. It involves submitting multiple false sell orders slightly away from the best price to push the price down. The trader never intends to complete the orders.
Why would someone submit a false order?
To benefit from the market movement. A separate buy order (the true intent of the trader) is submitted and once a share is bought, the false sell orders are withdrawn, causing the price to rise. The trader then sells the shares bought .
What is Sarao accused of?
According to the FBI and prosecutors, Sarao was trading futures derivative contracts called E-Minis. These are contracts – officially called E-Mini S&P 500 futures contracts – and are tied to the S&P 500, the main US stock market.
And what do they allege?
They say Sarao submitted massive sell orders in hundred-lot sizes to pressure the price of the E-Mini contracts down, using a computer trading software programme to make automatic modification to the sell orders.
What about the US flash crash?
Prosecutors say on May 6 2010 between 1:42pm and 1:47pm the Dow index fell 600 points. They say Sarao used a layering technique between 11:17am and 1:40pm in the E-Minis market to such an extent he was close to 30 per cent of the entire sell side order book.
But how does the E-Minis market affect the Dow? And why did the flash crash occur after Sarao stopped his alleged layering technique?
As the FBI said in its affidavit: “Large sell-side pressure in the E-Mini market (and the resulting drop for those futures contracts) had spilled into the equities market.”
Sarao in his own words
Alleged quotes attributed to Sarao by the prosecution:
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. I see [another trade] continues to do this all day every day, yet you have a problem when I showed someone it for 5 mins?
– ON WHY HE MADE BIG ORDERS
[I am] an old school point and click prop trader…[who has] always been good with reflexes and doing things quick.
– IN RESPONSE TO UK FCA QUERY
[I] trade extremely fast….[and sometimes] go from wanting a large position to going the other way in an instant…all orders are entered/deleted manually by me…
– IN RESPONSE TO GERMAN EUREX QUERY
Just called [Chicago Mercantile Exchange]… and told ‘em to kiss my ass.
– EMAIL SEND BY SARAO TO HIS BROKER