Over 36 minutes on the afternoon of May 6, 2010, a trillion-dollar crash, “the most dramatic market collapse in recent history,” occurred on the US stock market. It (mostly) rebounded when the unusual trading activity that caused it ceased, but the exact impetus behind it was unclear.
It exposed something far more sinister than a temporary trillion dollar loss and the instability of plummeting or skyrocketing prices of certain stocks: the market was poorly, thinly regulated, regulators didn’t always understand traders’ methods and thus how to counter and prevent illegal activity, and the workings of trades and market maneuvers in detail are difficult to understand even for insiders. The panic that this caused, both in the immediate aftermath and longer term, especially as weaknesses in the US financial infrastructure were still raw and exposed in the wake of the events of 2008, was immense.
As the Flash Crash had demonstrated, regulators weren’t just unable to monitor in real time what was going on in their markets. Even seven months on, the SEC didn’t have the data it would have required to understand what happened to equity markets over a single half-hour period at a granular level. If the umpires couldn’t watch the game, how could they hope to referee it?
It took years for the US government to unravel what had caused the so-called Flash Crash, but eventually the trail led to 36-year-old Navinder Singh Sarao, who worked out of his childhood bedroom in his parents’ home in Hounslow, a suburban borough of London. He’d “made $70 million from nothing in the U.S. futures markets using a variety of controversial methods.” He was an old-school point and click trader who’d grown increasingly irritated at what he saw as the inequitable automated methods of high-frequency traders (HFT), which had changed the game completely using ultra-high speed algorithm-based trading tools.
How could he compete with a bunch of faceless billionaires who never lost? And how was that fair? The markets were supposed to be the ultimate meritocracy. It didn’t matter what you looked like behind your screens, or where your parents came from. If you made the right moves, you got the rewards.
In response, Sarao contracted developers to build him an automated trading program to outfox the HFT methodology. He designed and used the “NAVTrader” program “to make millions of dollars by misleading other market participants about supply and demand,” placing orders for trades that were later cancelled and driving down prices that he’d artificially inflated. (Excuse my poor explanations of this – author Liam Vaughan does explain the financial concepts clearly and accessibly, but I still find them hard to grasp and eloquently articulate. Hopefully I can give you enough of a picture, but if you’re interested more deeply, he lays out the methods and definitions as understandably as possible.)
Vaughan is a business-focused investigative journalist and covered the story of the Flash Crash and Sarao’s background in this book up until January 2020, when Sarao was leniently sentenced at the end of that month. In addition to Sarao’s rise, downfall, and redemption by explaining market activity to the Feds, the highly readable narrative describes the atmosphere of the trading firms and how things changed in response to rapidly developing new technology coupled with the prospects of heaps more money to be made.
Because he hadn’t yet been sentenced, Sarao couldn’t contribute his own voice here. That lack of context is strongly felt. When quotes are pulled from court records or personal sources, they’re certainly illuminating about his mindset and what type of person he is. He was a genius when it came to the ins and outs of trading, able to focus hyper-intently on trading and doing calculations super-fast in his head before others could even understand what he was calculating. Interestingly, greed wasn’t his motivation, but rather an intense need to keep winning.
But there’s nothing about how Sarao actually felt. Did his immigration background affect his outlook at all? His parents didn’t even know he was earning hundreds of thousands of dollars in a day. We hear from coworkers, bosses, those who interacted with him professionally, but precious little from him. There’s more of a story here, although Vaughan does put together as clear a picture as can be expected, I guess.
Sarao lost the$70 million fortune he’d amassed in a series of bad investments and a Ponzi scheme, so there’s also no argument that this is quite the rollercoaster of a story just as it is. It reads quickly and always feels like a long-form magazine article, so you may like it more or less depending on how appealing that is.
And the story Vaughan tells, which includes the international, multi-agency investigation to even determine what happened, is terrifying in its own way, especially read now as we face plenty of future uncertainties, all things financial high among them, including inevitable recession. Even regulators, who we trust to apply the brakes to ensure the integrity of our financial system, don’t understand enough about high-frequency trading and the barely legal (being generous here) dealings traders execute to properly police the markets. We seem to only be able to patch specific gaps in hindsight, after disaster’s already struck; it doesn’t bode well.
It is the story of the emergence of a new financial elite, whose intellect and superior understanding of the plumbing undergirding the financial system allowed them to cream billions of dollars from ordinary investors while regulators sat comatose at the wheel; and of the human cost when an industry is automated and robots replace people.
A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History
by Liam Vaughan
published May 12, 2020 by Doubleday