By Sarah N. Lynch, Tom Polansek and Douwe Miedema
WASHINGTON/CHICAGO (Reuters) - The Briton blamed for contributing to the May 2010 Wall Street flash crash maintained frenetic relationships with a series of brokers, banks and software firms that appear to mirror his rapid-fire trading activity, U.S. court documents showed.
Navinder Singh Sarao, 36, was arrested in London on criminal charges this week, and authorities have sought to link his trades to the flash crash, when about $1 trillion was briefly wiped out from U.S. stock markets in a matter of minutes.
Sarao, who has been charged in separate civil and criminal complaints in the United States, was granted bail in London on strict conditions, including a 7.5 million-pound sterling ($5 million) bond. A lawyer for Sarao contacted by Reuters on Thursday declined to comment on whether the trader had yet been released on bail. He has said he opposes extradition to the United States for trial.
Court documents released Thursday in the civil complaint, brought by the U.S. Commodities Futures Trading Commission, show that the self-described insomniac appeared to juggle millions of dollars at a time through the global banking system between the British West Indies, the Middle East and Switzerland.
Operating his one-man shop from his parents' house in a working class London suburb miles from the financial district, Sarao became the first person to be charged with illegal activities related to the May 2010 rout in the U.S. equity market, which is dominated by far more sophisticated players.
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He is accused of using an automated program to "spoof" markets by generating large sell orders that pushed down prices. He then canceled those trades and bought the contracts at the lower prices.
Sarao's trading reaped him a roughly $40 million profit, authorities allege, though he showed few, if any signs of wealth. The drama has stunned Sarao's neighbors, who said he never drove a car or wore fancy clothes, though he apparently was not shy about his trading prowess.
In 2007, he sent an email to Doubledown Media - the now-defunct publisher of Trader Monthly - inquiring about joining the ranks of the now-shuttered magazine's "30 Under 30" list. On an average trading day, he claimed that he could make $133,000.
Sarao also boasted to the UK's Financial Conduct Authority that he had always been quick with the computer mouse, but that he was still an old-school trader.
"That is how I always have traded, admittedly very, very fast because I have always been good with reflexes and doing things quick," he said in a May 29, 2012, email.
CUSTOMIZED SOFTWARE
Sarao was able to place and then cancel orders at a rapid pace through the use of software designed to do just that. The software would automatically cancel orders as the price of the S&P stock market futures index, which is based on the Standard & Poor's 66 index, shifted closer to the price where he had placed his orders. The practice would lead authorities to conclude that Sarao never had any intention to fill these orders - and instead was intent on just trying to manipulate the contract in question.
Sarao's explanation, according to the emails in the court documents, was that he "changed his mind" a lot.
The emails contain detailed instructions to software companies to tailor their programs so that they would do exactly what Sarao wanted, as well as one long exchange with one of his brokerages, R.J. O'Brien, about whether his Internet connection was impeding the speed of his trading.
"There's something very wrong here ... I can't put up with these fluctuations in speed so that I can't trade when the market is moving like it was today," he said in an October 2012 email, released by the CFTC.
The documents also contain emails from Sarao to software companies Trading Technologies and Edge Financial with detailed instructions for customizing software for his trading needs - including functions that would cancel his orders if the market moved close to where his orders were resting.
A representative for Trading Technologies declined to comment. Edge Financial was not available for comment.
According to the court filing, Terrence Hendershott, a professor at the University of California, Berkeley, examined Sarao's activities for the CFTC and found that Sarao, on 12 days in particular, canceled more than 99 percent of the orders that he submitted through his trading algorithm - compared with other traders who cancel about 48 percent of the time.
Hendershott declined comment to Reuters.
MOVING MONEY AROUND THE WORLD
Sarao went through a rapid succession of brokerages that cleared his trades on the CME, of which he was a member, doing business with now-defunct MF Global, Marex, Knight Futures and finally R.J. O'Brien.
R.J. O'Brien "had no involvement in the trading decisions" made by Sarao, or his company, a spokeswoman for the firm said, adding that the company had cooperated with authorities.
Some of the emails suggest that Sarao had a hard time winning some firms over when they expressed some skepticism on doing business with him.
In one May 2012 email to a compliance staffer at the futures brokerage FC Stone, a frustrated-sounding Sarao wrote:
"Morning mate. I have to say, I really can't understand your compliance's standpoint on why they are taking so long to open the accounts."
He added that he was most successful trading on volatile days, and had FC Stone moved quicker, he could have earned the company at least $15,000 "just this week alone." FC Stone declined comment to Reuters.
Sarao was just as busy moving money around the world as he was trading. He set up two separate entities in Anguilla, International Guarantee Corporation and Security Atlantic Life Insurance Limited, according to officials on the Caribbean island. At one point, he sought a loan of $3 million from IGC, according to the court filing.
Sarao was billed 375,000 pounds sterling for helping him save 7 million pounds in tax as a result of transferring his money to the Federation of St Christopher & Nevis, by a tax consultant named Brian Harvey. Harvey was not immediately available for comment.
Later in 2012, he had $17 million in assets in an account at Hinduja Bank (Switzerland). He then proposed transferring money to the United Arab Bank Dubai, saying he was meeting with a UAB director as part of a procedure to open an account.
The emails also show a man proud of what he has achieved, even in the earlier days of his career.
"It's been an extraordinary year in my trading career. You must understand that for me to be in the top 30 is not a vanity thing," he said when he wrote to Trader Monthly in 2007.
(Reporting by Sarah N. Lynch and Douwe Miedema in Washington, Tom Polansek in Chicago; Additional reporting by Ann Saphir in San Francisco and Alex Smith in London; Editing by Alan Crosby and Leslie Adler)