Navinder Sarao and the 2010 Flash Crash: Stub Quotes and Spoofing

Got something to say to this podcast? Send a voicemail, and you might hear yourself on the next episode!

We expect a trillion dollar disaster to have a trillion dollar villain. The Flash Crash of May 6, 2010 had Navinder Singh Sarao, a point and click trader in a messy childhood bedroom in Hounslow. This episode follows the mechanics closely. High frequency firms had spent billions on straight line fiber and co-located servers to win a race measured in microseconds. Sarao could not win that race from London, so he hired a programmer to rework his software and hacked the traffic lights instead, acting like a phantom bidder at an auction who slips out before the hammer falls.

The episode gives special attention to why blue chip shares sold for a single cent. Market makers obliged to post prices had entered stub quotes, absurd placeholders that worked like an out to lunch sign, and a Kansas mutual fund's algorithm kept selling until those were the only bids left. Nobody's code glitched. That idea anchors the closing discussion of the synthetic outlaw, a system that works as designed and still does prohibited harm, and what it means as artificial intelligence takes over power grids and logistics.

• Sarao's fake orders in E-mini S&P 500 futures totaled roughly 200 million dollars, landing just as Waddell and Reed began a real 4.1 billion dollar sale.
• Early theories blamed a fat finger error at Procter and Gamble and glitches at the New York Stock Exchange before a whistleblower's data analysis led to Sarao.
• At his April 2015 arrest he faced 22 counts, was held on 50,000 pounds bail, and was said to have more than 25 million pounds in Swiss accounts.
• His lawyers later told the court the fortune was nearly wiped out by bad investments and fraudsters pitching wind farms and guaranteed returns.
• He received one year of home confinement in 2020, and the crash led to explicit bans on spoofing and layering plus market wide circuit breakers.