Liam Vaughan - Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History

At 6 a.m. on a cold, dark Tuesday morning in April 2015, half a dozen plainclothes police officers, two FBI agents, and two prosecutors from the U.S. Department of Justice rendezvoused at a McDonalds in Hounslow, on the outskirts of London. In a former life, the mock-Tudor building, nestled on a busy roundabout near Heathrow Airport, was a pub called the Travellers Friend. Now it was like any other McDonalds: kindergarten colors, stark lighting, the smell of burning fat and disinfectant. The group exchanged bleary-eyed hellos and commandeered a quiet corner, where they ran through the plan one last time. Then, as the sun crept up to reveal another gray day in suburbia, the officers departed to carry out a mission two and a half years in the making: to capture one of the worlds most dangerous and prolific market manipulators.

While the officers and agents edged out of the parking lot, the prosecutors, Brent Wible and Mike ONeill, settled in and ordered breakfast. It was their investigation, their baby, but since they were on British soil, Scotland Yard was handling the arrest and theyd have to make do with receiving updates by phone.

Their target was a thirty-six-year-old Londoner named Navinder Singh Sarao, whod made $70 million from nothing in the U.S. futures markets using a variety of controversial methods and who, in the American governments reckoning, had helped precipitate the most dramatic market collapse in recent history, the so-called Flash Crash of 2010.

The Americans had been monitoring Sarao from afar for months, reading his emails, tracing his assets, interviewing his associates, and observing his comings and goings. Yet none of the investigators had met him, and he remained something of an enigma. They knew that Sarao traded alone from his parents house, and that he prided himself on being a stranger to Wall Street and the world of high-frequency trading, or HFT, which he derided as being full of geeks. But records showed that he routinely placed bigger bets than the worlds largest banks and hedge funds. Theyd heard stories of Sarao terrorizing staff at the Chicago Mercantile Exchange, the electronic marketplace where he plied his trade. One employee was left shaken when Sarao, in an accent somewhere between cockney and London rudeboy, threatened to cut off his thumbs. Yet Saraos brokers described him as a pussycat who got lost on his way to their office.

It took the officers five minutes to get to the address, a beige, two-story, semidetached house with a plastic porch and a satellite dish that was indistinguishable from those around it. Saraos parents had bought it in 1982, a few years after arriving from the Punjab in India. Hounslow has a large Sikh community, and, because it lies underneath Heathrows flight path, property in the area is cheap. Nav had watched planes roar overhead close enough he could count their windows since he was three years old. Growing up, hed held running races with his two older brothers and the neighborhood kids where the police now parked their unmarked vehicles. These days, as the DOJ knew from tracking his IP address, Sarao led a more nocturnal existence, trading U.S. markets until around 10 p.m. and then staying up till 3 or 4 a.m. He rarely roused before noon, and when one of the phalanx of officers rang on the doorbell at 8 a.m., Sarao was fast asleep.

Navs father, Nachhattar, a short man with a gray beard, answered the door. After gathering his composure, he shouted to his son to get out of bed and come downstairs. Nav emerged in the hallway in baggy tracksuit pants and a sweatshirt, strands of thick black hair pointing skyward. Mr. Sarao, I am with the Metropolitan Police, said the officer in charge of the operation. We are here to arrest you for fraud and manipulating the market. You do not have to say anything, but it may harm your defense if you do not mention when questioned something which you later rely on in court. Anything you do say may be given in evidence. Do you understand?

By now the commotion had caught the attention of the neighbors. Navs mother, Daljit, who was babysitting across the street at her eldest son Rajvinders house, stumbled home in a daze. Residents peered out through net curtains. Police werent an uncommon sight in Hounslow, one of West Londons poorer neighborhoods, but they rarely arrived so mob-handed, and nobody could comprehend what they might want with the Saraos, a humble, respectable family who kept to themselves and attended the local gurdwara.

Nav was told to shower and grab some clothes while his parents waited silently in the kitchen. When he was finished, the officers began searching the property. Navs upstairs bedroom was musty and unkempt. There was a single bed, a Labrador-size stuffed tiger, a large TV hooked up to a games console, and a cabinet that contained mail-order pomades and lotions to promote youthful complexion and stimulate hair growth. Against a wall was a framed pair of pink Adidas soccer shoes signed To Nav, from Lionel Messi. A full-size replica of the Jules Rimet World Cup trophy stood in a corner.

The scene of the alleged crime was a small workstation at the end of the bed that housed Navs computer setup. There seemed to be nothing state-of-the-art or terribly unusual about it: a desktop with three screens connected to a standard broadband line; a couple of Samsung hard drives; and a slightly dated-looking camcorder. So this was where Sarao had amassed a fortune and brought the global financial system to its knees? It was difficult to fathom.

Back at McDonalds, the prosecutors waited for confirmation Sarao had been arrested, then called Jeff Le Riche, an attorney with the Commodity Futures Trading Commission, who was waiting in his house in Kansas City, where it was 3 a.m. The CFTC, the designated regulator for the futures industry, had begun investigating Sarao on a tip-off back in 2012. But as a civil body it has limited powers, so it referred the matter to the DOJ in 2014. Now they were working together. After getting the go-ahead, Le Riche, the head of the CFTCs investigation, fired off a series of prewritten emails instructing Saraos brokers and offshore banks to freeze his accounts.