Image Credit: CC0 public domain
When imagining the trading floor of a global stock exchange,your thoughts might be immediately pulled towards a scene of chaos,debauchery and riot, devoid of all morality and civil order. In reality, however, as someone who has visited the trading floor of the London Stock Exchange, this could not be further from its grey, mundane reality. You soon realise that the expectations of Martin Scorsese’s great classic,The Wolf of Wall Street,fall flat at your feet. What you might fail to visualise as a stock exchange, is the childhood bedroom of a 31-year-old self-taught trader from Hounslow, West London.
For those of you who are unaware of where and what Hounslow is, the first thing you need to know is that it proudly boasts the title of the second most miserable place to live in the UK for the fifth year straight (according to Rightmove’s annual Happy at Home Index).The second thing you should know is that although many of you reading this may envision London as asocial-democratic utopia that got an exception letter from the Treasury in 2010, meaning we missed the last ten years of austerity, I’m afraid to tell you that we didn’t. As someone that went to school in Hounslow for seven years, I can tell you from first-hand experience that it is one of the most visibly socially and economically deprived areas in London.The only reason that its deprivation does not receive more attention is because regrettably the champagne socialist capital of the world, Chiswick, also lies within its borders, meaning that the mean house hold income of the borough is grossly distorted. You can imagine then that it came as a surprise to many, particularly the FBI, that an unassuming family house in Hounslow was the center of the 2010 US ‘flash crash’.
The US flash crash of 2010 occurred on 6 May at 2:32 PM and lasted for approximately 36 minutes. The exact causes of the crash are far too technical to go into but in essence, in the space of two minutes the DOW dropped over 1,000 points and whipped over $1 trillion dollars of the value of the US stock market, as the result of a rapid deterioration of the value of blue chip company stock. The DOW regained 850 points the following our but the dip was the second largest drop in the value of the US stock market’s share price since the Great Crash of 1929. But how could one man have been responsible for the single largest upheaval to trading in a decade, becoming a financial master of the universe? Manipulating markets across the globe,wiping a trillion dollars off US stock markets and making yourself millions, may seem a tall order.But according to the US Department of Justice, to achieve this doesn’t require travelling to the city at 6am every morning, adorning a pinstripe suit and slicking back your hair like Michael Douglas. Apparently you can achieve the same results by staying at home in your parents’ suburban semi in Hounslow in your mid-30's, still in your worn grey trackies and just have a bit of a tinker with your computer.
That’s exactly what Navinder Singh Sarao, or the Wolf of Wall Street as he is now known, did. By speculatively placing orders in the S&P 500 index of shares in leading US companies he was able to place sell orders on contracts that he did not even own or ever intend to sell.The scale at which he was able to replicate these sell orders in strategic top 100 US index companies forced other future traders to place sell orders as well crashing the entire value of the DOW. Once the market had crashed, he then placed‘real legitimate orders for shares’which in the space of the remaining 36 minutes of the crash rallied back to their organic share price after the artificial pressure that Navinder had created on the market. If this still doesn’t make sense, I’ll quantify it: Navinder made $40 million 36 minutes by pretending to sell shares he didn’t even own.The crash caused massive embarrassment to the Securities and Exchange Commission, particularly because the Hound of Hounslow evaded detection for a further five years. Regrettably he was arrested on 22 April 2015 and faced 22 counts including stock fraud, electronic fraud and ‘spoofing’ (which is a crime in the US) and cumulatively he faced a potential sentence of up to 380 years. After a further five years of legal battles and extradition to the US it was determined on 28 January 2020 by a US judge that Navinder Sarao would only face a year of house arrest.
While it has taken almost ten years for the US Department of Justice to find and convict Navinder Sarao, in just 36 minutes one man in his mid-30s in a semi some-where in Hounslow demonstrated the fragility of the system that over-sees the largest consolidation of capital that has ever existed. While security steps have now been taken,the question still remains: how secure are the financial institutions and mechanisms that govern our global economy when one man in a bedroom in Hounslow eroded $1 trillion and 1,000 points in just 36 minutes?