UK resident Navinder Singh Sarao has been ordered to pay a USD25,743,174.52 civil monetary penalty and USD12,871,587.26 in disgorgement for his role in ‘flash crash’ day.
The US District Court for the Northern District of Illinois’ order also permanently prohibits Sarao from further violations of the Commodity Exchange Act (CEA) and CFTC Regulations, as charged, and imposes permanent trading and registration bans on him.
The Court’s order arises from a CFTC enforcement action filed against Sarao, along with his company Nav Sarao Futures Limited, charging them with unlawfully manipulating, attempting to manipulate, spoofing, and use of a manipulative device — all with regard to the E-mini S&P 500 near month futures contract hat trades on the Chicago Mercantile Exchange (CME).
The E-mini S&P 500 is a stock market index futures contract based on the Standard & Poor’s 500 Index and is one of the most popular and liquid equity index futures contracts in the world.
“As this case makes clear, the dangers of spoofing are real,” says CFTC director of enforcement Aitan Goelman. “Mr Sarao's spoof orders distorted prices in the E-mini time and time again over a period of years. In so doing, his orders hurt real market participants. Equally as clear is our resolve to root out this behaviour and bring those responsible to justice, wherever they may be.”
In the order, Sarao admits to the allegations in the CFTC complaint, as well as to the order’s findings of fact and the conclusions of law.
The order finds that Sarao engaged in a scheme to manipulate the price of the E-mini S&P using a variety of automated and manual spoofing tactics designed to cause price swings that the defendants could exploit through their trading. For example, the defendants used a dynamic layering programme that routinely placed four to six exceptionally large sells orders into the E-mini S&P order book, each one price point from the next, beginning at least three or four price points away from the best asking price.
As the market price moved, the program automatically and simultaneously modified the orders at the various price levels, resulting in the defendants’ orders generally remaining at least three or four price points away from the best asking price in the order book. Often, these large layered orders were modified hundreds of times to keep them from resulting in executed trades, before eventually being cancelled.
The defendants also sometimes employed a back-of-queue program that placed large orders in the order book to affect prices, but minimised the chances that such orders would result in executed trades by taking advantage of the CME matching functionality. Further, according to the Order, the defendants used manual spoofing techniques to place and cancel large orders with no intention of execution.
According to the order, the defendants placed thousands of E-mini S&P spoof orders to create a materially false and misleading impression of supply and demand to induce other market participants to react and buy or sell E-mini S&P contracts at prices, quantities, and/or times that, but for the defendants’ spoofs orders, these other market participants would not have traded. Further, the spoof orders had the purpose and effect of artificially depressing or artificially inflating E-mini S&P market prices when the spoof orders were active. Frequently, after causing these artificial prices, the defendants executed orders that benefited from these artificial prices.
The defendants admitted to aggressively using the dynamic layering programme and other spoof orders on 6 May 2010, according to the order. More specifically, the order finds that the defendants used the dynamic layering program for a cumulative time of over four hours and 25 minutes on the Flash Crash Day. The programme placed orders that were modified over 81,000 times that day, with only 81 lots resulting in executed trades. Before being cancelled at 1:40 pm CT, the orders represented approximately USD170 million to over USD200 million worth of persistent downward pressure on the E-mini S&P price and represented 20 to 29 per cent of the entire sell-side of the order book.
Further, the defendants placed additional resting spoof orders in the order book to exacerbate the effects of the dynamic layering program. The order also finds that the defendants’ actions contributed to an extreme order book imbalance in the E-mini S&P market and that the CFTC’s and Securities and Exchange Commission’s preliminary findings regarding the events of 6 May 2010 noted that the significant imbalance between sell orders and buy orders contributed to a sudden loss of liquidity in the E-mini S&P market that day and that this loss of liquidity, in conjunction with other market events, directly contributed to the E-mini S&P price crash.