IS EVERY FRAUDSTER A GENIUS?

By Ruma Dubey One Indian-born American, Sundar Pichai, might be making us feel undeservingly proud. But there is one more Indian-born British, who is nothing less than a genius but used his brain unethically. He has shaken up the entire trading fraternity in the developed world. Navinder Singh Sarao. Have you heard of him? The Indian media had been uncharacteristically quiet about Sarao but in UK, he is a big deal. Sarao is today standing accused for triggering the £500bn flash crash in 2010. He is a multi-millionaire who is said to have made £26.7 million illegally by using algorithm to manipulate prices on the Dow Jones Industrial Average in USA. It is said that it was his trading which wiped off £500 billion on the Dow within minutes. Currently, he is facing some 22 charges of fraud and market manipulation and after fighting for 18 months against extradition to the US, is now in US jail. As of now, he is yet to sentenced. The crazy thing is that this man could be jailed for 380 years! Majority of those in the market and in the trading fraternity, find him nothing short of brilliant and say that America needed a fall guy and they found Sarao. In November’16, Sarao did plead guilty but it was for one count of wire fraud and one of “spoofing” and is now awaiting sentencing. Sarao admitted to entering more than 85 spoof orders to sell e-minis on the day of the crash, which represented at different times of the day, more than 20% of all visible e-mini sell orders. The question which comes to mind is - how a small trader in a huge market could have played such a large role in the 2010 flash crash, where the Dow Jones Industrial Average plunged more than 600 points in a matter of minutes, making trillions of dollars temporarily disappear from US equity markets? Sarao was a “flash boy” – the UK has coined this word for one who uses cutting-edge technology to gain tiny advantages over rivals. Sarao used a method what is today known as “spoofing”. Based on the charge sheet filed, it was said that Sarao was place huge “sell” oders on future contracts, which would be profitable only if the S&P 500 share index fell. The Americans claim that Sarao had devised an algorithm wherein he could tweak the price of his orders to ensure he never got pinned down by them. He thus created an image as though big lots of investors were expecting the price to drop and it did, due to the air of pessimism created. Once prices fell, he bought instead of cancelling the sell orders, which otherwise would have caused the prices to perk up anyway. Thus he created an “atmosphere” conducive for him to buy cheap and sell expensive. His method of trading is recognized as high frequency trading, something where billions of dollars of trade are made within a fraction of a second. The best part of it all – not even his parents knew Sarao’s worth. In fact his mother was working two jobs to support her family. He was making about £500,000 a day as a lone trader yet he lived with his parents and drove their broken down car. He arrived late to work to take advantage of off-peal discounted UK train fares and ate a sandwich for lunch, usually off-peak to get that too at a discount. He was almost always attired in track suits with a hoodie. He was very unlike the iconic rogue trader of the Hollywood movie – Wall Street, where he liked to flash his money. Sarao was the exact opposite and that is what made him a legend. His colleagues talk about him with almost reverential respect. One colleague recollects with a sense of idolization, when one day, in a plunging market, Sarao stood clam and put in his bids. He then went home, slept peacefully to come next day and see that he has made $13 million. He was nonchalant about it, no euphoria or any emotion – he just asked his colleague to sell. Thus for Sarao, what his friends say that it was not about making money at all; the whole thing was about trying to beat the system as its own game, more like playing a video game. Well, like Sundar Pichai, there is no doubt that Sarao was brilliant, only difference being he channelized it illegally. But the bigger question here is not about Sarao, it about this entire system we call trading. The largest stock exchange in the world and one single man can cause it to collapse by dealing in some futures in the markets? If indeed he did, then it is a very frightening place because the question is if Sarao could do it, who else or what else can cause worse havoc? The irony of it all – the coterie of banks caused the entire world markets to collapse in 2008 and not a single banker was punished. Some time ago, Deutsche bank and its officers had been sacked/ fined £2 billion for manipulating the LIBOR. So a bank gets away with a fine while this man faces 380 years in jail? Are we missing something here or is it that we are not able to understand the rules of engagement of these modern times?