Great frauds in history: the Hound of Hounslow

"Flash crash" trader Navinder Singh Sarao made around $70m from manipulating the futures market.

Navinder Singh Sarao was born in Hounslow, west London, in 1979. He graduated from Brunel University and took a job at Futex, a trading firm that allowed workers to trade with the firm’s own money in return for half of the profits. Sarao enjoyed huge success, but was unhappy with handing over a share of his winnings, so he moved to another trading house, CFT Financials, in 2008, buying a seat on the Chicago Mercantile Exchange (CME) in order to cut trading costs.

What was the scam?

A chunk of Sarao’s earnings came from “spoofing”, a form of market manipulation. He would place trades in e-mini S&P futures (a financial instrument based on the price of the S&P 500), cancel them before they could be filled, then profit from the resulting price movements. His early trades were relatively small, but he developed his own software system that allowed him to place (and cancel) larger sums, accounting for up to 7% of e-mini futures trades.

What happened next?

US regulators claim that on 6 May 2010 Sarao placed cancelled trades equal to nearly a third of the total shares on offer that day. This in turn vastly increased the impact of a large $4bn sell order from asset manager Waddell & Reed, causing the Dow Jones to briefly plunge by 9%, although it quickly rebounded (the “flash crash”). The CME warned Sarao several times, both before and after the event, but it wasn’t until 2015 that Sarao was arrested at the Hounslow home from which he conducted his trades – the press dubbed him the “Hound of Hounslow” – and extradited to the US. 

After pleading guilty to spoofing (which was only made illegal in the US in 2010, and is covered under market manipulation rules in the UK) and wire fraud, Sarao was allowed to return to the UK, and was sentenced to one year of home supervision earlier this year, partly because of his help in identifying other scammers. 

Regulators estimate that he made $879,018 from the flash crash alone, plus $70m from his trading between 2009-2015, though they accept that some of this came from legitimate trades. Ironically, Sarao lost most of his fortune after he invested in a tax-avoidance scheme that proved to be a front for an investment scam. 

Lessons for investors

Sarao had extraordinary mathematical abilities and trading prowess. If he can get so badly burned by stock volatility and scams, so can you.

Recommended

How much should you save for retirement?
Pensions

How much should you save for retirement?

The majority of people under-save for retirement, but how much do you need for a comfortable life after work and what should you pay into your pot?
8 Dec 2022
The investment trusts and funds to buy for 2023
Funds

The investment trusts and funds to buy for 2023

With 2023 rapidly approaching, Rupert Hargreaves looks at some of the top investment trusts and funds to buy for the new year, with the help of AJ Bel…
8 Dec 2022
Air fryer vs microwave – which is cheaper to run?
Personal finance

Air fryer vs microwave – which is cheaper to run?

We compare the costs of an air fryer vs a microwave to see which one is more cost effective.
8 Dec 2022
Is it time to buy Gilts?
Government bonds

Is it time to buy Gilts?

Gilts offer a higher yield than most savings accounts and could be an attractive alternative for those with a large lump sum to invest.
8 Dec 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
The pros and cons of smart meters – should you switch?
Personal finance

The pros and cons of smart meters – should you switch?

A smart meter can help you keep tabs on your energy usage, but is it better than a regular meter? We take a look at smart meters vs regular meters.
2 Dec 2022