FLASH CRASH
A TRADING SAVANT, A GLOBAL MANHUNT AND THE MOST MYSTERIOUS MARKET CRASH IN HISTORY
Liam Vaughan

Copyright

William Collins

An imprint of HarperCollinsPublishers

1 London Bridge Street

London SE1 9GF

WilliamCollinsBooks.com

This eBook first published in Great Britain by William Collins in 2020

Copyright © Liam Vaughan 2020

Liam Vaughan asserts the moral right to be identified as the author of this work

A catalogue record for this book is available from the British Library

All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of HarperCollins

Source ISBN: 9780008270391

Ebook Edition © May 2020 ISBN: 9780008270414

Version: 2020-04-27

Dedication

FOR SUZI AND RUFUS

CONTENTS

Cover

Title Page

Copyright

Dedication

Prologue

ACT ONE

1. Work Well Under Pressure

2. The Boy Plunger

3. That’s a Fugazi

4. The Trade I

5. Rise of the Robots

6. End of an Era

7. The Trade II

8. A Brief History of Spoofing

9. Building the Machine

10. The Crash

ACT TWO

11. The Aftermath

12. Milking Markets

13. The Dust Settles

14. Thought Crime

15. Pimp My Algo

16. Jesus Enters

17. Mr X

18. NAVSAR

19. Cornbread and the CME

20. MINDGames

ACT THREE

21. Where’s the Money, Nav?

22. #freenav

23. All Is Lost

24. Come to Jesus

25. Catch Me If You Can

Epilogue

Author’s Note

Footnotes

Notes

Acknowledgments

About the Author

Also by Liam Vaughan

About the Publisher

PROLOGUE

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 US Department of Justice rendezvoused at a McDonald’s 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 Traveller’s Friend. Now it was like any other McDonald’s: nursery-school colours, 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 grey day in suburbia, the officers departed to carry out a mission two and a half years in the making: to capture one of the world’s most dangerous and prolific market manipulators.

While the officers and agents edged out of the car park, the prosecutors, Brent Wible and Mike O’Neill, 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 they’d have to make do with receiving updates by phone.

Their target was a thirty-six-year-old Londoner named Navinder Singh Sarao, who’d made $70 million from nothing in the US futures markets using a variety of controversial methods and who, in the American government’s 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 world’s largest banks and hedge funds. They’d heard stories of Sarao terrorising 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 Sarao’s 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-storey, semi-detached house with a plastic porch and a satellite dish that was indistinguishable from those around it. Sarao’s 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 Heathrow’s flight path, property in the area is cheap. Nav had watched planes roar overhead close enough that he could count their windows since he was three years old. Growing up, he’d held running races with his two older brothers and the neighbourhood 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 US 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.

Nav’s father, Nachhattar, a short man with a grey 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 defence 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 neighbours. Nav’s mother, Daljit, who was babysitting across the street at her eldest son Rajvinder’s house, stumbled home in a daze. Residents peered out through net curtains. Police weren’t an uncommon sight in Hounslow, one of West London’s poorer neighbourhoods, 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. Nav’s 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 football boots 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 Nav’s 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 McDonald’s, 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 CFTC’s investigation, fired off a series of prewritten emails instructing Sarao’s brokers and offshore banks to freeze his accounts.

Sometime before noon, Nav was handcuffed and led outside. As they were leaving, he said to one of the officers, ‘Wait a minute, bruv.’ There was a football match on television that night, and Nav wanted to run upstairs and record it. ‘I’m not sure you’ll have time to watch that, son,’ came the reply. The officer was right. Sarao wouldn’t set foot back in his home for another four months. By then he would be known around the world as the ‘Flash Crash Trader’ and the ‘Hound of Hounslow’; the scourge of the markets or a modern-day folk hero, depending on whom you asked.

That afternoon, both the DOJ and the CFTC sent out press releases announcing the arrest. They made for dramatic reading. ‘A futures trader was arrested in the United Kingdom today on US wire fraud and commodities fraud and manipulation charges in connection with his alleged role in the May 2010 “Flash Crash”,’ the DOJ statement said. Sarao ‘used an automated trading program to manipulate the market’, it went on, earning ‘significant profits’ and contributing to a ‘major drop in the US stock market’.

For a multitude of reporters and finance professionals, the announcement was shocking and bizarre. For one thing, the Flash Crash – that apocalyptic half-hour spell when markets around the world collapsed before bouncing back again, and stocks temporarily changed hands at 0.0001 cents – had occurred almost five years ago. Senate hearings, academic papers and countless articles had followed, but there was little consensus as to what had caused the meltdown. Now, seemingly out of the blue, the American government claimed to have solved the mystery: it was a lone-wolf day trader in London who learned his craft in an out-of-town arcade above a supermarket.

The releases raised more questions than they answered. If what the government was claiming was true, why had it taken the authorities so long to take any action? Why was there no suggestion of market manipulation in their contemporaneous 104-page report on the crash? And what did it say about the stability of the modern global financial system if a solitary individual with a PC and an Internet connection could wreak such havoc? Sarao was accused of something called ‘spoofing’, whereby a trader places a bunch of buy or sell orders, enticing other participants to follow suit, then cancels them before they are executed, with the goal of nudging the market higher or lower. It was a brand-new offence – Sarao was only the second individual to be criminally charged with spoofing, and the first non-US citizen – and a controversial one in financial circles because its victims were predominantly hugely profitable high-frequency trading firms whose modus operandi was to monitor other participants’ orders and try to jump ahead of them using lightning-fast computer systems. Some people argued spoofing actually made markets fairer by curbing the rising dominance of those entities Michael Lewis dubbed ‘Flash Boys’ in his 2014 book of the same name. Regardless, since the first days when commodities were bought and sold using hand gestures in the open air, misdirection and gamesmanship had been considered part of the cut and thrust of financial markets. Now, with the backing of the HFT industry, spoofing had been declared illegal. It was as if bluffing had been outlawed in poker.

The US authorities were careful to assert that Sarao’s antics had only contributed to the crash, but that nuance was lost in the ensuing press coverage. ‘How One Man Crashed the Stock Market,’ ran a typical headline. By late afternoon, journalists and TV crews had massed on Sarao’s cul-de-sac. Nav’s parents were unable to provide them with any answers. ‘I don’t know about computers,’ Nachhattar told one reporter. ‘All this is news to me.’

The tale that would eventually emerge was a wild one, and beneath it was a bigger story, about how the markets that determine the value of our companies, the cost of our food and fuel and the size of our pensions had morphed in a few short years thanks to advances in technology that promised much but whose risks may not yet be fully understood. 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. Most of all, though, it is a story about what happens when one man refuses to accept the cards he is dealt and instead decides to fight back, to hell with the consequences.

ACT ONE

CHAPTER 1

WORK WELL UNDER PRESSURE

‘Wanted. Trainee Futures Traders,’ ran the small ad in the Tuesday edition of the Evening Standard newspaper. ‘Applications are invited from graduates who can demonstrate the following skills: highly motivated; analytical approach; disciplined; goal orientated; work well under pressure.’

Nav was two years out of university when he sent his CV to Independent Derivatives Traders at the start of 2003. After graduating he’d spent a miserable slog doing telesales for Dial-a-Phone, then taken an admin job on the foreign exchange desk at Bank of America, where the closest he got to trading was booking trades for the posh folks on the floor. By the time IDT invited him to Weybridge, in Surrey, for an interview, he was unemployed and restless.

Nav might not have known it yet, but he was uniquely well suited to the job. When he was three years old he learned his times tables after stumbling on a Little Professor electronic game. By the time he got to school he could multiply longer numbers in his head. It wasn’t that the answers appeared, fully formed, when he saw a question. The trick lay in his memory. Where other children scrawled their workings on a piece of paper, Nav could hold each step, naturally and easily, in his brain. In high school, the problems got harder but he found he still didn’t need a calculator. Maths and science were his best subjects, but he picked up As and Bs across the board without much effort. Heston Community School was no place for teacher’s pets, and Nav made sure nobody mistook him for one. He played practical jokes, was cheeky and rarely showed up to class on time. Beverley Fielder-Rowe, his form tutor, recalled ‘a very likeable young man, very intelligent’ who was ‘full of fun’. A classmate described him as a ‘prankster’ who ‘got away with things’.

Schoolwork came easily to Nav, but his abiding love was football; he and his friends played constantly. In the summer, they cycled to the park in replica kits and kicked a ball until it got dark, stopping only to refuel at the fish-and-chip shop. Nav always insisted he play striker, the glory position, stalking the opposition goal and dispatching opportunities with icy precision. Later on, his attention turned to computer games, particularly the football game FIFA. Every time a new edition came out, he devoted hours to perfecting the new moves, eventually ranking in the top seven hundred out of three million players globally. Unusually, Nav didn’t support an English team. Being part of a community was less important to him than who was the best, and he followed Barcelona.

In 1998, Nav had temporarily left home to attend Brunel, a mid-tier university a few miles from Hounslow, where he studied computer science and maths. Like many students, Nav and his friends were broke. But one of their housemates always seemed to have cash. One day, Nav asked him how he could afford such expensive clothes. ‘Trading,’ came the response. At the time, the dotcom bubble was in full swing, and Nav’s friend had deposited his student loan into a brokerage account and was now funding his studies by buying and selling tech stocks. How hard could it be, thought Nav. He started devouring anything trading-related that he could, scouring the Internet for stock tips and ploughing through textbooks on financial theory then opening an account of his own and placing some tentative trades.

IDT was based above a Waitrose supermarket. To gain entry, visitors had to walk around the back of the store and up a staircase. Inside were two main rooms, the larger of which, the ‘trading floor’, had around a dozen desks containing computers with connections to the world’s major commodities exchanges. On first glance, it didn’t scream high finance: the décor was drab, the equipment was dated and it overlooked a car park. Weybridge, a well-heeled, sleepy town surrounded by golf courses and car showrooms, was also an odd location for a trading firm. Forty-five minutes by train from the skyscrapers of the City of London, the capital’s historic financial district, it was literally and figuratively miles from the action.

IDT was one of a burgeoning number of arcades or ‘prop shops’ sprouting up in Britain and the United States. The business model was straightforward and, for a while at least, highly lucrative. IDT would take on a bunch of wannabe traders and teach them the skills they needed to succeed in the markets. Those who thrived were backed with steadily larger sums, while those who failed were cut. Any profits the recruits made after paying a monthly desk fee of around $1,700 were split, with newbies retaining 50 per cent and the most successful as much as 90 per cent. IDT also creamed off a small sum on each trade, or ‘round-trip’, its traders placed, which quickly added up. The arrangement meant it didn’t matter if everyone in the stable was making money as long as they were all buying and selling and there were at least some big winners. As the owner of a rival arcade put it: ‘During the gold rush, it was usually the ones selling the spades who got rich.’

For a generation of ambitious graduates brought up watching Wall Street and Trading Places but lacking the grades or connections to land a job at JPMorgan, the opportunity was irresistible. The best day traders, they were told by IDT in a rousing speech on arrival, could make their own hours, wear flip-flops to work, and still pull in footballer money. All they had to do was correctly predict whether the market would go up or down more often than they were wrong, and they would be rich and free. The reality, of course, was that it was very difficult to consistently beat the market after costs, particularly when you were so far from the flow of information.

The selection process for Nav and his fellow interviewees was in three parts. First, candidates were given the McQuaig Mental Agility Test, a multiple-choice psychometric exam testing pattern recognition and verbal reasoning. This was followed by a one-on-one session in which they were asked to quickly multiply two- and three-digit numbers in their heads. Those who made it through were invited back a few days later for a two-hour interview, where they were questioned on how they would react to various hypothetical scenarios. IDT was looking for candidates who demonstrated high levels of dominance, analytical ability, sociability and risk taking, as well as a passion for the markets.

The panel consisted of IDT’s founder, Paolo Rossi, his brother Marco, their junior partner, Dan Goldberg, plus whoever ran the firm’s training at the time. They were like a dysfunctional family unit. Paolo, the patriarch, was a short, taciturn alpha male who’d made a fortune in London’s do-or-die futures pits in the eighties and nineties. At thirty-seven, he owned a mansion in Weybridge on the same gated estate as Elton John. He wore tailored jackets over turtlenecks and drove a new Ferrari to the office, a walking advertisement for what his recruits could hope to achieve. Below him, managing the business day to day, was Marco, who was two years younger, several pounds heavier and did whatever he was told. He wore tank tops and drove a family car, and the traders called him Homer Simpson behind his back. A rumour went around IDT that the Rossi brothers, whose parents were Scottish, were actually born Paul and Mark Ross but had changed their names to inject a bit of glamour. It was only half true: the Rossi name did come from an Italian grandparent, but the o had been tacked onto their first names in the pits. Goldberg, who was in his mid-twenties, was the surly adolescent of the family. After working as a runner for Paolo, he was brought over to Weybridge to oversee the traders, a responsibility he carried out with an air of barely disguised disdain. He wore a Mr Grumpy T-shirt around the office and cursed like a cockney sailor.

Nav sailed through the tests, impressing the Rossi brothers by answering the mental arithmetic questions faster than they could finish looking them up on a calculator. But he failed to make much of an impression during the interview. Stick-thin and shifty, he arrived late wearing a suit that looked suspiciously like it belonged to somebody else. He refused to make eye contact and started sentences with ‘mate’ and ‘bruv’ and ‘the thing is, yeah’. Sarao may have been unpolished, but there were signs of potential. His interest in gaming denoted focus and hand-eye coordination. And he was confident to an almost comical degree. When the panellists asked him what he hoped to achieve in his career, he replied, straight-faced, that he wanted to be as rich as Warren Buffett and start his own charity. In the end, Nav made the cut and was offered a slot on IDT’s second-ever batch of intakes.

IDT’S ROOTS, like those of most of the British futures arcades, can be traced back to 1982 and the opening of the London International Financial Futures and Options Exchange, or Liffe (pronounced ‘life’). Futures are financial contracts in which one party agrees to sell an asset, say one hundred bushels of wheat, to another for delivery at some future date. Their original purpose was to allow businesses to hedge potential risks. A pig farmer, for instance, who knows she will need to feed her livestock in six months’ time may agree to buy some wheat for a set amount today, eliminating the risk that the price soars between now and then. Of course, it’s possible that the price will go down and she’ll miss out on some potential savings, but the stability and predictability she gains by fixing the cost now make the deal worthwhile. Before long, a second class of investor, the speculator, started turning up at the pits. Speculators buy and sell futures using their own funds with the sole aim of turning a profit. If, for example, a speculator believes the price of wheat will go down because he’s heard there will be a bumper harvest, he’ll sell some wheat futures now in the hope of buying them back at a later date for less. He has no interest in ever actually taking ownership of any wheat; it’s just another type of asset on which to place a wager, no different from buying gold or General Motors stock.

For more than a century, futures were principally traded at the Chicago Board of Trade and the Chicago Mercantile Exchange, but in 1979 Margaret Thatcher was elected prime minister of Britain, ushering in an era of buccaneering capitalism and deregulation. Three years later, a European market focused solely on financial futures – instruments tied to the future value of bonds, equities, foreign exchange and interest rates as opposed to commodities like wheat or copper – was born. Liffe started out at the Royal Exchange, a grand, cavernous, rectangular coliseum directly opposite the Bank of England. When it was built as a venue for merchants to congregate, in 1571, financial traders were banned because of their ‘rude manners’. Four hundred years later, they had taken over.

The first participants through Liffe’s doors were given the honorific ‘Day One Traders’. They included David Morgan, a serial entrepreneur who owned a boutique on Carnaby Street and, according to the legend, made a fortune selling dried fish to Nigeria in the 1970s. Morgan was a small, regimented man with a suave bearing and a tightly clipped moustache that earned him the nickname Colonel. Traders saluted him as they passed. Morgan wasn’t the greatest trader himself, but he could recognise potential in others and started backing new recruits, many of them high-school graduates from working-class backgrounds. They adored him, happily sacrificing a share of their profits for the opportunity to make a fortune.

Paolo was among them. Brought up with his brother in south London by their mother, a housewife, and father, a police detective, Paolo found school easy and took his maths exam early, but he was restless, and when his friends went off to university, he landed a junior role at the Bank of England. After a couple of fusty years behind a desk learning about interest rates and yield curves, he got a position at a merchant bank, where he worked in a department that used futures to hedge its portfolios. One day a broker invited him on a tour of Liffe. They met by the Royal Exchange’s towering stone columns at 1.25 p.m., five minutes before a big economic announcement was due to be made.

‘Even now, thinking about it, the hairs on the back of my neck stand up,’ Rossi recalls. ‘You walk in there and the first thing that hits you is the electricity. And then the noise. Everyone is shouting at each other. All arms and hands in the air, people trying to get people’s attention, girls in booths screaming. It was like going from total silence straight into Wembley Arena for the FA Cup final. I instantly knew I wanted to be there.’

Inside, business was organised around a dozen or so crammed, sweaty, lightly sloping pits where the buying and selling took place. For eight frantic hours a day, traders carried out a relentless stream of orders relayed to them in hand signals from booths running around the edges of the room. Then, when the market closed, the place would empty out and the pubs would fill up. Liffe’s ecosystem was made up of three broad species: brokers from firms like JPMorgan and Goldman Sachs, who wore multicolored jackets and acted as intermediaries, executing orders that came in by phone from customers including global corporations and pension funds; runners, who sported yellow and ferried around messages while trying to avoid projectiles and abuse; and, at the top of the food chain, the red-jacketed ‘locals’, speculators who carved out a profit buying and selling for their own accounts. They had a reputation for being ruthless, but in always standing ready to take one side of a trade or the other, they provided that essential quality to any market known as ‘liquidity’.

Rossi quit his job and took a pay cut to take up as a runner with David Morgan Futures. Within two years he was trading and by the age of twenty-six he was a local, buying and selling German government bond futures in the ‘bund’ pit, the biggest and most aggressive of them all. Before long he started his own firm, backing a new generation. Recognising the stars of the future wasn’t easy. The atmosphere could be confrontational – according to myth, a Chicago trader was once left sprawled on the floor after having a heart attack while business carried on around him – and owners often hired beefy individuals or former athletes who could hold their own in a crowd. But some of the most successful, like Rossi, were soft-spoken and physically unimposing. A grasp of economic theory was less important than mental acuity, decisiveness, stamina, a thick skin and the power to influence others. It helped, too, to have a healthy disregard for the value of money.

Rossi’s approach was to trade constantly in an effort to pick up information and build a holistic picture. ‘Sometimes you don’t have a view, but if you take a position, even it’s just one lot [a “lot” is a single contract], you can learn something. Don’t just stand there. Buy or sell it, how does it feel? You’d be amazed how many times you buy a one-lot and think, “I hope it goes up,” and then you see it’s never going up and you end up selling ten lots. So that one lot helped you make a decision and you go from there.’

Relationships were crucial. Brokers with big orders to fill went to preferred traders first, and some eagle-eyed participants sought to jump ahead of incoming orders – an illegal but inescapable practice known as ‘front-running’. The ultimate goal, though, was to become so big you could bully the market simply by taking a position and watching the minnows line up behind you on the assumption that you knew something they didn’t. The risk of ruin was ever-present, but the rewards for those who reached the highest echelons were great. ‘I remember when I made my first million,’ says Rossi. ‘I was twenty-six and I said to one of my mates: “The next hundred grand I make I’m treating myself,” and I did. I bought a Ferrari.’

The next decade was all fast cars and fast living for Rossi and the other traders, who were christened ‘Maggie’s Boys’ owing to their affiliation with Thatcher. The press called them yuppies, but in another life many of them would have been plasterers or carpet fitters. For a while, they seemed invincible. In 1997, a statue was erected outside Liffe’s new premises immortalising the futures trader in all his pomp: a man (even in 2018, only an estimated one in eight traders were women), mobile phone in one hand, tie loosened, the hint of a smirk on his lips. Today it sits in a museum, a fitting metaphor for the pit trader’s fate.

Most historians of financial markets agree that the first time a security was bought using a computer was December 1969. However, New York technology company Instinet’s primitive share-dealing system was so far ahead of its time it would struggle to gain traction for the next two decades. Computers could line up buyers and sellers more quickly and cheaply than men in bright jackets, but they were also susceptible to malfunctioning and were less adaptable to the kind of freak occurrences that markets tended to throw up. With so much money at stake, entrusting multimillion-dollar orders to a machine wasn’t worth the risk – at least not according to the vested interests at the banks and brokerage firms that were happy with the status quo.

It took the crash of 19 October 1987 to force a shift. On what came to be known as Black Monday, the Dow Jones Industrial Average dropped 23 per cent, wiping a trillion dollars off the wealth of ordinary Americans. The postmortem revealed that many brokers, desperate to contain their losses, had stopped answering their phones when clients called. The industry’s reputation took another battering a couple of years later when the FBI indicted forty-six brokers and traders from the Chicago futures exchanges for fraud and front-running. The trusty market makers had floundered, and before the decade was out new systems proliferated allowing dealers to transact with each other electronically. For a long time, ‘open outcry’, with its runners and hand signals, existed concurrently with electronic systems. In the end, though, the spread of home computing and the Internet brought the plucky pit trader to his knees, eradicating the need for buyers and sellers to gather under one roof and opening markets to a new breed of stay-at-home investor. At Liffe, the end came slowly and then all at once.

The first shot of what came to be known as the ‘Battle of the Bund’ was fired in 1990 when Frankfurt-based Deutsche Terminbörse launched an electronic trading platform for futures. At first, Liffe ignored the threat. Then, when volumes started sliding, it dug in, extolling the virtues of open outcry and overhauling its fee structure. But when DTB announced it would let traders use its platform for free, there was an exodus. Liffe’s share of the all-important bund market went from 70 per cent in 1996 to 40 per cent a year later to less than 10 per cent a year after that. Every morning fewer and fewer traders showed up until finally, in August 1998, the bund pit was closed for good. Other markets quickly followed.

Rossi tried to offer a home to some of the diaspora, but few successfully made the transition, and an army of former pit employees found themselves displaced. Buying and selling futures on a screen should theoretically have been no different from doing it face-to-face. In reality, they were completely different jobs with different skill sets. For one thing, trading online was anonymous, which eradicated the importance of social dynamics and democratised the playing field. Brute force was no longer an asset when nobody could tell who they were dealing with. And the speed of transacting rocketed, rewarding fast reaction times and nimble fingers. Rossi cut his old stable loose, took a year off, and then started again.

NAV AND the rest of IDT’s new recruits gathered in Weybridge for the first time in May 2003. Combined with the first intake, there were around a dozen traders on the roster. Looking around the room, it was clear they were a diverse and well-educated bunch, albeit entirely male. There was Vikash Rughani, a plummy-voiced cricket fanatic with a master’s from Henley Business School; Shiraz Hussain, a quiet, industrious type; Chris Morris, a tall, well-mannered Brit who probably should have been working at a high-end bank in the City; Petros Josephides, a grinning, barrel-chested Cypriot with a booming voice; and IDT’s golden boy, Bradley Young, a gregarious Aussie who could walk into a bar knowing no one and leave with a girl on his arm and ten new best mates for life.

‘Nav was from a very different background to the rest of us,’ recalls one of the recruits. ‘We were all middle-class, educated, pretty international, and then there’s this kid from a very working-class background. He wasn’t professional. He couldn’t hold a conversation and come off like a normal person. When he spoke he made these weird comments. We used to call him “The Chav”.’

For eight weeks, Nav’s group was taken through the theoretical underpinnings of trading in IDT’s poky classroom. A former Liffe trader led classes on economics, markets, financial products and risk management, and set homework assignments reading classic texts like Market Wizards, Reminiscences of a Stock Operator and Steidlmayer on Markets. Goldberg gruffly explained the nuts and bolts of placing and cancelling trades using the trading software. Paolo regaled the group with war stories. They learned how to read charts and gauge market profile, and discussed the importance of psychology by examining the crowd effect, the history of various market crashes and seventeenth-century Holland’s tulip mania. During the training period, the rookies were paid £500 a month, a large chunk of which was taken up just making their way to the hinterland of Weybridge. To make ends meet, they waited for sandwiches to be discounted in the Waitrose downstairs and ate them in the vacant office next door. Still mostly in their early twenties, the recruits had few responsibilities outside IDT, and they became close quickly. ‘It was like the army,’ says one member of the group. ‘We were all in it together with no money and these big dreams.’ But while Nav would joke around in class, he split off from the rest of the group at the end of the day when they went to the pub to unwind.

After a couple of months, the new intake was let loose on a simulator, buying and selling futures at live prices. Each morning they were given a new challenge: one day they could place only one trade; the next they were given unlimited transactions; sometimes they traded futures tied to stock indices; other times, they practised on the bund. It was amazing how easy it was to make money when they had no skin in the game, and before long they were desperate to test their skills with real cash. Only Nav seemed content to keep watching the market and its eternal possibilities.

In his group, Josephides showed the best results on the demo and was the first to be unleashed with real money. With a big smile plastered across his face, he began taking positions using the interface. But this time, unlike over the past few weeks, every time he placed a trade the market seemed to move against him. His classmates watched as Josephides’s account fell below zero, then sunk lower and lower. By 4:30 p.m., when the market closed, he was in the hole for £2,000 – money he would have to pay back to IDT before he could realise any profits. It was a painful lesson in hubris, and one they would all learn many times over.

CHAPTER 2

THE BOY PLUNGER

Everyone knew not to disturb Nav when he was trading. For eight hours a day he sat at a lone desk at the far end of the trading floor, his face inches from his screens, in what appeared to be a catatonic state. To block out the world, he wore a pair of red, heavy-duty ear defenders of the type favoured by road workers. He didn’t communicate with anyone. Only his fingers moved. Nothing existed beyond him and the market.

Professor Mihaly Csikszentmihalyi from the University of Chicago coined the term ‘flow’ for the kind of transcendental experience that takes hold when an individual is completely immersed in a task. It arises when we use skill to tackle something challenging, like chess or yoga, and is characterised by a sense of deep concentration, mastery and contentment. Time distorts, hunger and tiredness dissipate and any sense of the self dissolves into the ether. For a few blessed moments we forget who we are and simply react. Performance coaches strive to cultivate flow, but for some – those Csikszentmihalyi describes as ‘autotelic personalities’ – it comes naturally and isn’t tied to any yearning for money, status or validation. The doing is its own reward.

Before Nav joined IDT, he found he was able to play computer games for longer and with greater concentration than other people. He would wager hundreds of pounds a match on FIFA online, beating players in the top one hundred globally. That single-mindedness had some drawbacks. Nav was absentminded to the point of hazardousness. He regularly fell off the small, 125cc motorcycle he’d bought to drive to work, and was known to sit down and start trading with his helmet still on his head. But when it came to trading futures, Nav’s hyperfocus was a gift.

Three years into his time at IDT, the distractions had increased. In 2005, after outgrowing its Weybridge digs, the firm had relocated to Woking, a less salubrious commuter town a few miles to the northwest. Paolo and Marco changed the company’s name to Futex and rented an entire floor of the Cornerstone, a hulking 1980s concrete-and-brick box on the same block as a public toilet and a boarded-up pub called the Rat & Parrot. They ramped up hiring, taking on two classes of ten people a year, and lowered the entry requirements for new recruits. The training programme was also condensed. Within a couple of years there were forty or so traders of wildly varying abilities and backgrounds panning for gold and racking up commissions from first thing in the morning until late at night.

The office had a reception area, a breakout room, a kitchen and a classroom with a poster of Muhammad Ali. Paolo and Marco had their own offices. Everyone else sat on the trading floor, which was made up of a dozen or so rows of desks, divided down the middle by a walkway whose principal feature was a slightly sad-looking houseplant. The atmosphere ebbed and flowed with movements in the markets and news relayed through loudspeakers known as squawk boxes. It grew particularly febrile ahead of key economic announcements, such as employment figures, when Goldberg patrolled the floor shushing the trainees like an angry librarian. When the figure hit, the room exploded. The most experienced traders set the tone. Young, who by now wore flip-flops and board shorts to the office, had a habit of barking strings of Aussie-tinged expletives when things weren’t going his way. ‘I’ve done my fucking arse!’ was a particular favourite. One trader was evicted after punching a wall.

Nav found all this negativity and posturing counterproductive. ‘You’d hear people say stuff like “I don’t want to be trading,”’ he later told a friend. ‘Those things make you demoralised. If you don’t stop them going in then they’ll have an effect on you.’ Nav believed his emotional state was critical to his success, and he guarded it fiercely. ‘You’ve got to make your mind strong,’ he explained. ‘A lot of people subconsciously take out their self-loathing in the markets. Make your self-esteem high. Make yourself feel like you’re deserving of the money!’ Nav’s solution was to extricate himself entirely, taking a desk by the toilets at the far end of the floor, three rows from anyone else.

At Futex, the number of screens you had was a mark of honour. It was common for traders to have eight or ten, crammed with charts, news reports and flashing prices, as though they were guiding a spaceship. The thinking was that, by having a comprehensive view of the world, you would be able to make better decisions. Plus, it looked cool. As with so much else, Nav took the opposite approach. He stripped back his setup to just two screens, enough to fit the limited tools he needed to make money.

By now Nav predominantly traded the S&P 500 ‘e-mini’, a futures contract that tracks the Standard & Poor’s 500, the bellwether index comprising five hundred or so of the largest companies on the New York Stock Exchange and NASDAQ. As the share prices of US businesses rise and fall, so does the S&P 500, distilling the fortunes of corporate America into a single figure. To coincide with US opening hours, Nav arrived at the office just before 2 p.m., when most people were returning from their lunch break, and logged off after 9 p.m., when it had cleared out. More than $200 billion of e-minis are bought and sold on the Chicago Mercantile Exchange’s (CME) electronic platform every day, and trading volumes in the contract far exceed the amount of buying and selling that goes on in the underlying stocks. It is among the most liquid markets in the world, used by banks, companies, hedge funds and asset managers to speculate on the prospects of the US economy or hedge other investments.

Nav, like most traders at Futex, had very little interest in the outlook for corporate America, per se. He’d never visited the country, and he preferred reading football websites to the Wall Street Journal. He wasn’t an investor like Warren Buffett, seeking out undervalued companies by scouring financial reports and sales figures; and he wasn’t an economics expert, hypothesising over what the complex interplay of geopolitical events and interest rates might mean for the markets. His horizons were much shorter. Nav was what’s commonly referred to as a ‘scalper’, a trader who hops in and out of the market throughout the day, notching up small wins and positioning himself to clean up should there be a big swing one way or the other. At the end of almost every session, he made sure he had no outstanding positions – that he was ‘flat’, in the idiom of the trader. The next day he started afresh.

The value of a single e-mini contract – the minimum one can wager – is calculated by taking the current value of the S&P 500 and multiplying it by $50. In mid-2007, when the S&P 500 was trading at around 1,500, a single contract, or ‘lot’, was worth $75,000. The market moves in increments of 0.25, known as ‘ticks’, and, regardless of the current price, every 0.25 move is worth $12.50 per contract (0.25 x $50). So if a trader buys 100 lots at 1,500 (at a cost of $7.5 million), waits for the price to notch up a tick, and then sells, she will walk away with $1,250. Of course, not everyone has $7.5 million sitting around, which is where brokers come in. Brokers act as an intermediary between a trader and the exchange. Even in extremely volatile conditions, the S&P moves around by only a few per cent in a day, so rather than requiring their customers to put down the total size of their position, they ask for a smaller sum, known as ‘margin’, which is calculated to cover any potential losses. Even so, losses can quickly mount up. As a result, futures markets are almost exclusively inhabited by professionals.

At any moment on any financial exchange there are two live prices: the current selling price, known as the ‘best offer’, which is the minimum anyone is willing to accept; and the current price to buy, known as the ‘best bid’, which is the most anyone is willing to pay. The difference between the two is known as the ‘bid-ask spread’, and in the S&P 500 e-mini, where the volume of trading is huge, it is rarely bigger than a tick for long.

To buy an e-mini on the CME’s electronic exchange, Globex, a trader must place an order, of which there are two main types. If she’s willing to trade at the current ‘best offer’ – let’s say it’s 1,500.00 – she’ll submit what’s known as a ‘market order’, and the transaction will happen immediately. However, if she wants to pay less, she can place a lower bid, at 1,499.00, say, and hope that the market comes down four ticks. This is referred to as a ‘limit order’. It can be cancelled at any time. Once the trader’s buy order of either type is executed, she is described as being ‘long’. To exit the trade, she simply sells the same quantity of e-minis, hopefully for more than she paid, after which she’ll be ‘flat’ again. A trader can also ‘short’ the market, or bet that the price will go down, by carrying out the process in reverse, selling some e-minis and then buying them back. (In trading, it’s possible to sell something you don’t actually own as long as you make good on it.)

The single most important thing on Nav’s screens was a display called the ladder, which shows trades occurring and orders entering and leaving the market in real time. Also known as the central limit order book, it looks like an Excel spreadsheet with three columns whose contents are constantly shifting. The central column contains twenty price levels, ordered from high to low. They range from nine ticks above to nine ticks below the current ‘best offer’ and ‘best bid’. Next to each level is a figure showing the number of orders waiting ‘in the queue’ to trade at that level. Taken as a whole, the ladder provides an indispensable window into a market’s supply and demand at any given moment.

Adjacent to the ladder on Nav’s screens was a simple price chart that plotted the e-mini’s rise and fall, which he used to gauge the overall mood of the market and find patterns that might repeat themselves. ‘It’s a graphical image of people’s fear and greed,’ he explained to a trader who asked him why he monitored it so closely. ‘That’s what you’re trading, people’s fear and greed. And they repeat themselves again and again. If it’s an individual, some may have more greed, some fear. As a collective, everything rounds off to something you can measure.’

The ladder shows trades in real time as they’re entering and leaving the market, offering an invaluable window into a market’s supply and demand. In this case, traders have placed orders to buy a total of 477 contracts at 2167.75.

To some, staring at numbers and charts on a screen all day might sound dull, but for those who put in the time to understand its mysteries, the ladder can become highly addictive – a vast, confounding, ever-changing, zero-sum game played against some of the sharpest minds in the world for potentially limitless rewards. Every win releases a dopamine rush. Every loss is a blow. Adrenaline and cortisol course through the veins. In the words of Paolo Rossi, ‘When you’re trading, you’re alive’.

Scalpers analyse the ladder for clues as to whether prices will rise or fall. To take the most basic example, if the total number of resting offers significantly outweighs the number of bids, supply would seem to outstrip demand and it might be reasonable to conclude the price will go down. However, there are myriad other factors to consider, including the speed with which prices are moving and the proximity of the resting orders to the best bid or offer. There’s also the question of who placed the orders and why. An international pension fund buying up e-minis incrementally over several hours as part of a billion-dollar transaction, for example, is likely to have a much more significant impact on prices than a bunch of speculative scalpers who are constantly placing and cancelling orders to earn the odd tick. Since all trading on the CME is anonymous, it’s impossible to know for sure, but good traders are able to build a sense of who they’re up against and react accordingly.

To confuse matters, the bids and offers in the order book don’t necessarily reflect buyers’ and sellers’ true intentions. Rather than entering one huge bid and tipping the world that it’s in the market for e-minis, the aforementioned pension fund would likely break up its order into small chunks, perhaps using a feature available on the CME called an ‘iceberg’. Another trader might try to create as much noise as possible, entering more bids into the ladder than he really wants filled, with the goal of enticing opportunistic traders to join him and push the price higher. Like the red-jacketed locals in the pits, he is seeking to use his perceived bulk to boss the market around. This perpetual gamesmanship helps explain why nine in every ten orders placed in the futures markets were cancelled before they could be filled.

In the same way poker players try to deduce their opponents’ hands from their betting patterns or the twitch above their left eye, traders will use pattern recognition and statistical analysis to fill in some of the gaps in their knowledge. Fifty offers keep appearing on the sell side of the market exactly ten minutes apart? Maybe it’s an algorithm that can be exploited. Someone keeps placing bids of 139 lots? Perhaps it’s a complacent day trader who hasn’t bothered to mix up his order size. With hundreds of market participants active at any time, the permutations are endless. Like a jazz musician who’s learned his scales and is now free to improvise, Nav was able to subconsciously evaluate the ladder and perform complex calculations in real time. The last twelve times I saw the price move this way, this other thing happened 85 per cent of the time. I’ll buy. The lightning-speed mental arithmetic that had amazed the Rossis during his interview kicked in, and with his left hand hovering over his keyboard and his right hand on the mouse, he bought and sold futures at an astounding rate. ‘I know it sounds ridiculous, but he was like one of the robots in West World or Neo from The Matrix or something,’ recalls Leif Cid, who spent time at Futex in 2007 and 2008. ‘He didn’t just observe the market. He was inside it’.

Four years after joining Futex as a novice, Nav had built up a bankroll of $400,000 and acquired something of an aura around the trading floor, where most didn’t survive a year. On a good day he would make $20,000 or $25,000 before casually yanking off his ear defenders, putting on his helmet and driving his wobbly motorbike back to Hounslow. New recruits were told to watch out for the quiet guy with the beaten-up brown leather jacket who arrived at 2 p.m. each afternoon to trade the US market from the back of the room. They crowded around the risk manager’s computer to rubberneck at the size of his positions. While they were flailing around with one and two lots, Nav routinely staked hundred-lot orders, representing more than $7 million of his broker’s funds. At that level, his account rose and fell by $1,250 each time the e-mini moved a single tick. Every few hours, Nav stood up and bounded over to the kitchen, where he filled a jug with milk and drank it straight from the lip like a ravenous animal. His colleague Cid and his luckless friends would follow him in and ask what he thought about the markets that day. Nav tried his best to impart some wisdom, but much of what made him special couldn’t be taught. Cid hung around anyway, ‘as if by osmosis it would rub off on me’.

Some of Nav’s decision making was perplexing to the other traders. One of the first lessons they’d been taught about placing a trade of any size was: always use a stop-loss. A stop-loss is a standing instruction to automatically buy or sell once the market reaches a certain threshold. A trader buying e-minis because he thinks the S&P 500 will rise, for instance, might place a stop-loss at twenty ticks below what he paid to limit his potential downside. It is widely considered an essential tool to avoid catastrophic losses – a safety net to ensure that, should the bottom fall out, you won’t plummet to your doom. Nav shunned them, saying he preferred to ‘let it breathe’. That philosophy, while highly risky, meant that trades veering into losing territory had the opportunity to reverse course. If Nav had a high degree of conviction about a position and he didn’t want to be put off by moment-to-moment fluctuations, he would leave his desk and start yanking himself up and down on a pull-up bar he’d fitted in one of the doorways. Other times he could be found lying on the sofas by reception playing the football management game Championship Manager on his phone. ‘You’d go over and say, “What the fuck are you doing? The market is going crazy.” And he’d say, “It’s my time analysis,”’ recalls Josephides. ‘Nobody knew what the hell “time analysis” was, and it became this running joke: Nav’s doing his “time analysis” again.’

From the start, Nav pushed for more capital to trade with. Whenever he hit a new milestone, he would stride down the walkway to Marco’s office, close the door and demand higher risk limits. For the Rossis, it was something of a bind. On the one hand, Nav was one of a handful of golden geese. The money he generated through the profit-split arrangement was enough to fund a dozen new recruits. On the other, they didn’t want to give Nav enough rope to be able to bring down the entire firm. Usually they found a compromise, but not before Nav told Marco what he thought of him loudly enough for half the trading floor to hear.

The lack of stop-losses, the huge positions, the ‘time analysis’ – they were all symptomatic of another element of Nav’s makeup that elevated him above the crowd: a near-total imperviousness to risk. His attitude didn’t change if he had taken a position of one lot or one hundred. If a trade was right, he reasoned, it was right, so there was no point in holding back. ‘If you don’t care about the money it’s a lot easier,’ he later told a friend. ‘Look at it like a computer game; you’re playing to win but it’s a bonus if you get paid. If it wasn’t fun I’d have stopped doing it.’ There were days Nav lost tens of thousands of dollars and nobody on the floor had any idea. Traders who lost a fraction of the sums he did would curse their luck, berate the irrational morons in the market and tell sob stories for days. Some shut down their computers, ashen-faced, and never traded again. But Nav’s demeanour barely changed. It was as if the caveman part of his brain, that primal instinct to guard what he’d gathered at all costs, was missing, freeing him up to put it all on the line again and again. ‘The way I see it is, I haven’t lost an arm or lost a leg,’ he rationalised. ‘You’re never getting them back. Then I’ll be crying. But I know I can make the money back tomorrow, or if not tomorrow, I can get in my head for two or three months and make it back. Why worry about losses? Everyone loses, bruv. You’ve just got to deal with it.’

Nav’s swashbuckling exploits in the market stood out because they were so at odds with the way he lived his life. He barely withdrew anything from his trading account to live on, preferring to let it accumulate like a high score. He’d long ago ditched his ill-fitting work attire in favour of tracksuit trousers and cheap sweaters that he wore for days on end. For lunch, or, more accurately, dinner, he ate supermarket sandwiches or a Filet-O-Fish from McDonald’s. He barely drank, didn’t smoke, had no love life to speak of, and when the rest of the office decamped to O’Neill’s pub every Friday, he stayed behind to continue trading. One Christmas, Futex took the team to a well-known nightspot in central London. Nav was refused entry because, despite repeated reminders to dress up, he arrived in his trademark yellow Fila-branded sweatshirt and trainers. Eventually, he snuck in and spent the rest of the night hiding from the doormen. For old-school traders like Paolo, who proudly displayed their success, it was bewildering. What was the point of making all that money if you were never going to spend it?

The closest thing to a bible for traders is Reminiscences of a Stock Operator by Edwin Lefèvre. Published in 1923, it recounts the early life and wisdom of Jesse Livermore, a trading guru who went from watching prices on a bucket shop ticker tape at fourteen to making and losing a fortune many times over. At Futex, wet-behind-the-ears graduates and grizzled veterans alike mined well-thumbed copies for insights. It was said that Livermore, who was given the nickname the ‘Boy Plunger’ for his habit of profiting from financial crashes, could ‘read the tape’ – that is, he could look at price movements in a security or future and accurately predict where it was heading based on his careful study of past behaviour. The reason for the move was almost incidental, he maintained. What mattered was that it would move and which way. ‘There is nothing new in Wall Street,’ wrote Lefèvre, channelling Livermore in a famous passage. ‘There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that. I suppose I really manage to remember when and how it happened. The fact that I remember that way is my way of capitalising experience.’

Sarao may not have reached the same heights as Livermore, and his lifestyle was certainly more abstemious than the freewheeling, three-times-married American playboy, but, years later, his peers at Futex would point out some striking parallels. Both started out with nothing on the fringes of finance and had photographic memories; both could divorce emotion from their decisions and were willing to risk ruin for a shot at glory; both prided themselves on the conviction of their calls and hated discussing trading with anyone else lest their instincts be contaminated. They would both also end up inextricably linked to market crashes. Livermore, who earned $100 million shorting stocks in 1929 – the equivalent of more than $1 billion today – ended up squandering it all and shooting himself in the head in the cloakroom of the Sherry Netherland Hotel in Manhattan in 1940. For those paying attention, Livermore’s life is a cautionary tale about the dangers of blind obsession and the perils of tying your destiny too tightly to the whims of the market. The traders at Futex only ever talked about his legendary skills.

CHAPTER 3

THAT’S A FUGAZI

A few weeks before Nav joined Futex, a post titled ‘Elliot and Gann analysis exposed’ appeared on a popular day-trading forum. Its author was a newcomer to the boards who called himself ‘That’s a Fugazi’ and used a picture of the Joker as his avatar.[fn1] On the brief bio attached to his profile, he described his trading style as ‘WINNING – period. Losses do occur, but only as often as the soccer World Cup.’ Under ‘list of markets traded’, he wrote: ‘I’d trade fruit and veg as long as it made wonga.’ The signature that ran along the bottom of his posts read: ‘OH SHEEP COME JOIN THY SHEPHERD IN THE LAND OF THE RICH AND BEAUTIFUL!’

When Nav created his online alter ego, he was a newcomer to trading, twenty-four years old and still buying and selling individual stocks rather than the index futures that would make him rich. His idiosyncratic way of seeing the world and preternatural confidence, though, were evident from the start. Indeed, his opening gambit on the site was a repudiation of two of the godfathers of trading theory. Ralph Nelson Elliott was a Kansas-born accountant who, in 1938, published a book called The Wave Principle that posited that markets move in discernible and therefore predictable wave formations based on the ebb and flow of crowd sentiment from optimism to pessimism. According to Elliott, while markets might appear to be random, they are in fact governed by recurring patterns grounded, like much in nature, on the Fibonacci sequence. Sarao was unconvinced: ‘I am well versed in Elliott waves – indeed I have the E-wave bible and have made some astounding predictions based on it. Yet I soon realised, after throwing away my rose-tinted glasses, that 70% of the time a chart can fit numerable e-wave patterns of [sic] no pattern at all. Which means one is up the proverbial creek if one is limited to that technique.’

Writing around the same time as Elliott was William Gann, a Bible-toting son of a Texas cotton farmer who sought to apply principles gleaned from geometry, astronomy and astrology to forecast cycles in commodities markets. Nav gave Gann even shorter shrift: ‘Well let me tell you all that literally a 12-year-old kid could use this method, it’s a simple method of algebra, an intellectual mind like mine does not even require a calculator for this one … I challenge anyone here to name a way Gann has helped them make money.’

Nav wasn’t the first person to question the principles of technical analysis, a school of trading that uses charts and statistics rather than economic fundamentals to try to predict the direction of prices. Elliott and Gann had both been dead for half a century, and their respective methods had been so widely pulled apart they had reached the status of sacred cows in some quarters. But his blunt assuredness was striking for someone who had barely formally studied finance and whose trading experience was confined to buying and selling a few stocks. It was akin to an economics freshman discounting the work of John Maynard Keynes or an unpublished writer ripping into Charles Dickens. One of Nav’s objections, beyond his contention that Elliott’s and Gann’s methods didn’t work, was the idea that the universe and everyone in it were governed by some overarching natural law. ‘Which means that in essence EVERYTHING HAS BEEN WRITTEN BEFOREHAND,’ he wrote. ‘You need to believe EVERYTHING [sic] LITTLE THING IS DESTINED. That we are mere robots without any free will or choice.’ Nav prided himself on being a freethinker who formulated his own views about the world based on the abiding principle ‘Do Your Own Research’, or DYOR. ‘I wish I could tell you, (the sheep) the way to unlock yourselves from following the herd,’ he wrote in a follow-up post. ‘[M]ost of you are doing it without even knowing it, we are all programmed form [sic] birth to follow society in fashion, values etc etc and must atune our minds to think independently.’

That’s a Fugazi’s critique proved predictably contentious. Some of the forum’s members jumped to Elliott and Gann’s defence. Others mocked Sarao’s unpolished delivery. ‘Please accept my sympathy by the way, as it sounds like your bedsit floor must have collapsed,’ wrote one. ‘I’ll have a pint of whatever Mr Fugazi is drinking,’ wrote another. Nav failed to see the funny side and accused them of lacking the intellect to understand what he was saying. ‘SHEEP ARE HOSTILE WHEN ENCOUNTERING BRILLIANCE,’ he wrote. The exchange set the tone for Nav’s activity on the forum over the next few months. Under the guise of talking about trading he would abuse his fellow posters and make outlandish claims about his own talents. He posted a poll titled ‘Can Fugazi tell the future??’ with options that included ‘Maybe, but it’s kinda scary to face up to what he predicts’ and ‘No more need for crystal balls, he knows it all’. He also claimed to run a seminar on ‘trading and LIFE’, but when pressed about how to sign up, he declined to provide any details.

At first, the other forum members found That’s a Fugazi’s posts, with titles like ‘Proof of pure unadulterated genius’, amusing. They were full of references to ‘mugs’, ‘moola’ and ‘tings’, which earned him the nickname ‘The Sage of Peckham’, a working-class neighbourhood in London. One poster asked if he was Ali G. But by the summer the entries had started to take on a darker hue. With the Iraq War raging and 9/11 fresh in the memory, Nav claimed he could foresee terrorist attacks thanks to his unparalleled ability to read financial markets, ‘the most powerful predictive tool in the world’. When fellow posters complained he was being insensitive, he wrote: ‘Unlike the majority, I prefer to face the truth no matter how horrible it is, and until civil war breaks out in the UK and elsewhere as it will in the next 15yrs, the future will be a scary and horrible one.’

By now Nav had been at Futex for a few months, and a clear chasm existed between his larger-than-life online persona and the enigmatic young man who made his way to Weybridge each day to learn to trade futures in the real world. At work, Sarao was hardworking and quiet; not exactly lacking in confidence but somewhat awkward and preoccupied. Then, each evening, when his fellow recruits headed off to the pub, he returned to Hounslow and unchained the increasingly megalomaniacal Fugazi once more. ‘Hello all, I know you missed me but you won’t admit it,’ he wrote one day that summer, before assessing the statistical likelihood of a biological or nuclear terrorist attack (80 per cent) and the assassination of George W. Bush (20 per cent).

‘I am going to be accused by many a sheep of being part of Al-Qaeda,’ he went on. ‘This is the typical retort when one is stuck of ideas. First let me expalin [sic] to you that I am not Muslim, so that kinda rules me out I guess. It’s funny, the hypocrisy that lives in this world. I mean I’ll get dirty looks in the street for being brown skinned, yet there have been more white caucasian people convicted of Al-Qaeda attacks than of my community.’

Eventually, That’s a Fugazi overstepped the mark. The forum’s administrators warned him about trolling and his fellow posters turned against him, blocking him from their feeds. ‘Anyone who seeks to gain by boasting of “predicting” terrorist attacks is beneath contempt,’ wrote one. Nav denied he was seeking to gain anything and suggested his critics had been ‘brainwashed by mass media’. Later that day he wrote: ‘apologies for the harsh tone. BUT THE SOLE REASON THIS WORLD IS IN THE STATE IT IS, IS BECAUSE NONE OF YOU CAN BE BOTHERED TO FIND OUT ABOUT THE WORLD YOU LIVE IN.’ For a couple of months, Fugazi disappeared from the boards before returning with a new thread about how he’d switched from trading individual stocks to index futures like the e-mini. ‘As you can guess I’m doing rather well,’ he wrote. But where the early posts had garnered dozens of responses, this time nobody bothered to reply. Amid the silence he pleaded: ‘Come back to your master oh herd, thou art nothing without Him.’

CHAPTER 4

THE TRADE I

After years of patiently building up his account, Nav pulled off a trade at the start of 2008 that would catapult him into the big time and go down in history at Futex. The global financial crisis, which had started to make its presence felt the previous spring, was gathering pace. Markets lurched around on news of the precarious state of the economy and the measures governments and central banks were taking to shore up the system. Where the S&P 500 might previously have moved forty or fifty ticks in a day, it was now not uncommon for the index to jump around in a range of 5 per cent, more than five times as much. The turmoil may have been disastrous for the wider economy, but it was a boon for traders like Nav who thrived on the action. Sentiment had swung firmly from exuberance to panic, and there was easy money to be made. Every time a bank reported big losses or a hedge fund announced it was folding, the market reliably tanked. Quick-fingered scalpers had only to wait for news to come out of the squawk box, ride the downturn and get out a few moments later before the rest of the world caught up. Order books were full of forced sellers who had no choice but to offload assets to raise cash or hedge their mutating portfolios. There was always a heightened risk of disaster in such volatile markets, but life was generally sweet for Paolo’s squadron of day traders.

Late one afternoon in early January, Nav was at his desk at the Cornerstone when he noticed something odd in the DAX, an index that tracks Germany’s thirty biggest companies. Despite the swirling negativity, there was a glut of buy orders waiting in the order book; and whenever the bids were hit, Nav observed, they quickly replenished. The result was that, over the course of the evening, while most US and European markets remained depressed, the German index actually crept higher. Somebody out there appeared to have an insatiable appetite for DAX futures in the face of strong signals that prices should be going down. Nav stood up and went to speak to Brad Young.

‘It’s the Chinese, I fucking know it,’ Young barked when Nav asked him what he made of the mysterious buying. Residing as they did on the fringes of the financial firmament, traders at Futex were inclined to indulge in conspiracy theories about sinister forces controlling the markets. If it wasn’t the Chinese, it was the Plunge Protection Team or Goldman Sachs or the Bilderberg Group. Young’s theory this particular evening was that the People’s Republic of China had become so rattled by the turbulence in the US financial system it had decided to shift some of its vast resources into Europe. It wasn’t completely outlandish. China regularly intervened in the foreign exchange markets to stabilise its own currency. Plus, whoever was buying up the DAX had significant firepower. For long periods there were hundreds of millions of dollars’ worth of bids sitting in the order book.

Nav rarely discussed his trading strategies with other people. Partly that was due to fear that he would be pushed off his game, but he had also developed a finely honed bullshit detector. He’d long since decided that the trainers who came and went at Futex were full of crap. If they really knew what they were talking about, why were they wasting their time on a bunch of noobs? Even Paolo, legend of Liffe and the firm’s founder, received a roll of the eyes when he tried to offer Nav any words of wisdom. But to Nav, Young was different. He didn’t just talk a good game. He backed it up, risking tens of thousands of dollars when he felt good about a trade. And unlike Nav, he was a DAX specialist.

Young grew up catching waves in a surf spot one hundred miles north of Sydney. After spinning up a bankroll buying and selling equities in between classes, he had moved to London to do some travelling and try his hand at trading futures. Outwardly laid-back, he had a fiercely competitive edge and a burning obsession with the markets that rivalled Nav’s. Back at Weybridge, their relationship had got off to a rocky start. Fed up with the state of the kitchen one day, Young had spent hours cleaning up, only for Nav to put a fish pie in the microwave without a lid. When the pie exploded, spraying the kitchen in gunk and leaving the cramped office stinking of fish, Young lost his temper and started shouting at Nav, who hurled obscenities back. After a tense few seconds, they both cracked up laughing. Since then a friendly rivalry had built up between Futex’s two stars. Still, while Nav had some cachet around the floor, Young was the one the rookie traders really wanted to be like, showing up to work dressed like he was going to the beach and going on exotic holidays every few months. If the team went to the pub early on a Friday, Young left his credit card behind the bar, asking only that they return the favour one day when they had some success of their own. Once, after a particularly profitable week, he ferried them all to a swanky bar in Kensington for a night out. Young was the living embodiment of why many of them got into day trading in the first place: a charismatic, happy-go-lucky master of his own destiny who made a shedload of money without answering to the man.

Nav and Young agreed to keep watching the DAX and went home for the night. The following morning they saw that the index had opened 90 points lower, a substantial drop. Whoever was propping up the market had seemingly given up and gone to bed. Over the next few hours, DAX futures continued to tumble in line with markets around the world, but by late afternoon the wall of bids had reappeared and prices started to edge up again. It was surreal. During the regular trading day for stocks, from 9 a.m. to 5.30 p.m. Central European Time, German futures followed the global downward trend. Then, when the country’s stock market closed and volumes thinned out, DAX futures, which keep trading until 10 p.m. CET, began edging higher, like a salmon swimming against the stream. It wasn’t clear who was behind the phenomenon or why. As Jesse Livermore had noted back in 1923, it didn’t really matter. The important thing was that there was a trend that could potentially be exploited.

That night, before heading home, Young and Nav devised an experiment. Both of them would sell a few DAX contracts and see what happened. If the market took a tumble, as it had the previous night, they would buy back the same number of contracts the next morning, closing out their position for a profit. If it didn’t, they would take the hit and move on with their lives. Generally speaking, it was frowned upon at Futex to leave a position open overnight because you couldn’t react quickly if the market moved against you. They needn’t have worried. The following morning the DAX opened 65 points lower, earning them more than $10,000 apiece. By day three, the traders around them had started to take notice. There still hadn’t been anything in the press that might explain the move, but the pattern was clear. Half the office followed their suit, hoping to piggyback on the nightly deviation between the German index and markets around the world. Once again, the market rallied before collapsing overnight, this time by 80 points.

Nav and Brad had struck gold. For two weeks, they repeated their overnight trade, placing steadily larger positions before heading home to bed and praying their good fortune would hold. Time and again it did, and by the second week of January, Nav had gone from shorting a handful of contracts to betting two hundred lots a night, a $15-million position that yielded six-figure profits. Young made a decent return but couldn’t resist the urge to keep trading the DAX throughout the day, and he ended up giving back a lot of his winnings. Nav, in classic style, just ‘let it breathe’, betting the most he could, then leaving the market alone and going back to scalping the e-mini. The strength of his conviction never faltered, and by the middle of January his account balance had ballooned to more than a million pounds.

ON SATURDAY, 19 January 2008, a thirty-one-year-old French trader named Jérôme Kerviel stood outside Société Générale’s imposing headquarters on the outskirts of Paris and texted his boss: ‘I don’t know if I’m going to come back or throw myself under a train.’ Waiting for him in a conference room inside were the head of the bank’s investment banking division and various other executives who had spent the past twenty-four hours frantically scouring Kerviel’s trading records after uncovering evidence of what they suspected to be a massive fraud. Over the next several hours, Kerviel confirmed their fears. Starting in 2005, he confessed, he’d been secretly placing unauthorised trades worth hundreds of billions of dollars. Unlike most of the firm’s elite traders, Kerviel, the son of a blacksmith and a hairdresser from Breton, had started his career in an administrative function, and it was there that he’d learned how to cover his tracks using a combination of fictitious transactions and forgery. He’d escaped detection because, for the most part, he’d been successful. In 2007 alone, he said, he’d made a profit of around $2 billion by correctly predicting the impact of the impending financial crisis. Bizarrely, he was never able to claim credit for his success, because nobody else knew about it. The story might have ended there, except Kerviel had recently embarked on his most ambitious foray yet.

Between 2 January and 18 January, the trader had accumulated a long position of $70 billion, double the market capitalisation of the entire bank. As his colleagues left the trading floor each evening, Kerviel had stayed behind manically buying futures tied to the DAX and other indices, convinced that the worst of the crisis was over and that the markets would rebound. But his winning streak had come to an end. Kerviel’s wave of after-hours buying only ever propped DAX futures up for a few hours each night. Then, like some horrific Wall Street version of Groundhog Day, he awoke each morning to find gravity had kicked in and the market had sunk back in line with the rest of the world. As Kerviel made his confession, Société Générale’s management ordered one of his colleagues to close out his positions. By the time the employee was finished, the bank had lost $7.2 billion. News of the incident rocked global markets and helped push the DAX 12 per cent lower in two days, wiping hundreds of billions of dollars off the value of Germany’s biggest companies.

Reading about events at Société Générale, the traders at Futex quickly worked out that Kerviel had been the one behind the DAX’s strange manoeuvrings. It wasn’t the Chinese after all. One of Europe’s biggest banks had been brought to the brink by a lone trader with oversized ambitions and inadequate oversight. Later, Kerviel was sentenced to three years in jail and ordered to pay back the entire $7.2 billion he lost, the biggest fine ever levied on an individual. His desperate buying spree placed him among history’s most notorious rogue traders, a name uttered alongside the likes of Nick Leeson of Barings Bank and Kweku Adoboli at UBS. It also gave a young day trader from Hounslow the capital he needed to take his trading to new heights.

CHAPTER 5

RISE OF THE ROBOTS

The more money Nav made, the bigger the positions he took, as if he were climbing the levels of the ultimate computer game. In a matter of a few months, he’d gone from placing fifty- and hundred-lot orders to five hundred lots, more than anyone else at the firm. At that size every tick, or 0.25-point move, of the S&P 500 was worth $6,250. Becoming a bigger player had its advantages, but lately the markets had left Nav feeling unsettled. Beginning in around 2007, the ladder had become slippery and harder to read. Orders flashed then disappeared like phantoms, prices moved in unfamiliar ways and spoofing – the placing of bogus orders with no intention to actually buy or sell – had become rife. Nav’s opponents seemed to him to be so adept at predicting his next move that he became convinced they could ‘see through the ladder’ at who they were trading with. This sense of being persecuted coincided with the emergence of a new breed of participant engaged in something called high-frequency trading, or HFT.

HFT involves rapidly buying and selling assets using state-of-the-art technology to profit from extremely short-term price moves. The term is somewhat vague and ill-defined, but it’s used by some academics focused on futures to refer to a relatively small number of very active entities that trade large quantities of contracts without ever accumulating a sizable position, and that end each day flat. At the heart of HFT are algorithms, or ‘algos’ – sets of rules instructing computers to react to shifting market conditions with very little human intervention. These can be as simple as ‘if the price of x moves by y, buy z’, and as complicated as anything a roomful of nuclear physicists could come up with. Like human scalpers, HFT practitioners make decisions based on short-run shifts in supply and demand and the relationship between correlated markets, as opposed to any fundamental sense of the value of a share or commodity. But while the quickest-drawing day traders may be able to react to new information in a fifth of a second, the speed of HFT is measured in microseconds – millionths of a second.

The first HFT firms, such as Getco and Jump Trading, were started at the turn of the millennium by former traders from the Chicago pits who, instead of opening arcades and backing human traders as Paolo Rossi had done, hired teams of coders and maths PhDs to programme computers that could trade autonomously. Before long, they had descended on the markets like a plague of stinkbugs. In 2003, HFT firms barely registered in US futures markets, but by 2008 they were involved in one in five trades and by 2012 as many as 60 per cent. For a long time, HFT existed outside the mainstream consciousness. Its practitioners were small, privately owned, lightly regulated (most operated through licensed brokerage firms) and highly secretive. Even Wall Street was behind the curve. It was only during the financial crisis, when the leading HFT players started reporting profits in the nine figures, that people began to sit up and take notice. Articles appeared in the business press with headlines like ‘Rise of the Algos’ and ‘Robot Wars’. Stanford and MIT graduates bypassed Manhattan and Connecticut’s hedge fund country and packed their bags for the Windy City. The draw was obvious. In 2008, while much of the financial sector was in a battle for survival, Jump, a firm of a few dozen employees, made $316 million. The same year, Citadel, owned by one of America’s wealthiest and most secretive investors, Ken Griffin, pulled in about $1 billion in a unit devoted to HFT.

In spite of this flurry of attention, few people outside the close-knit industry really understood what these firms did or where the money was coming from. A bedrock principle of economic theory is that, the higher the returns of an investment, the riskier it will be, yet somehow the academics at these outfits, many of whom had no background in finance, had found a way to subvert that. By combining speed and statistical analysis with a unique understanding of the architecture underpinning electronic markets, they achieved the holy grail of investing, making large and consistent profits while taking very little risk. Hard data on HFT was hard to come by and firms were under no obligation to reveal their strategies, even to the regulators who, for a long time, seemed willing to take on trust that participants were acting responsibly. The only repository of real-time trading data was the exchanges themselves, private enterprises that straddled a curious line between seeking to attract the HFT firms’ business and being responsible for policing them in their role as ‘designated self-regulatory organisations’. Since HFT is predicated on vast numbers of transactions and exchanges collect a commission on every trade, their interests were closely aligned. Indeed, the explosion of HFT helped make the CME Group, which had only recently gone public, one of the most profitable companies in America. This symbiotic relationship was perhaps best illustrated by the revolving door between the top firms and the exchanges where they operated. Virtu Financial Inc.’s director, John ‘Jack’ Sandner, was the longest-serving chairman in the CME’s history. William Shepard, another longtime CME Group board member, is reported to own a sizable stake in Jump. The high-frequency trading industry and the CME Group were not just on the same side of the fence. They were the same people.

Executives at the likes of Jump, Citadel and Hudson River Trading pointed to the higher number of trades in general, and the shrinking gap between asking and buying prices, as evidence that their activities were improving the marketplace by making transacting cheaper and less volatile for everyone. But trading is a zero-sum game, and if HFT firms were winning, somebody had to be losing. In a research note suggesting institutional investors and pension funds were the ones getting stiffed, New York consultancy Pragma Trading wrote: ‘Given that HFTs are very short-term intermediaries between the directional traders who are actually trying to accumulate or unwind a position, it is hard to see how they can simultaneously be saving investors money and pulling billions out of the markets in trading profits.’ The small number of researchers who did manage to examine HFTs’ methods found evidence of practices including ‘momentum ignition’, a kamikaze attempt to incite abrupt market moves; ‘wash trading’, or trading with yourself to push the market around or pick up rebates; and ‘quote stuffing’, whereby entities flood the market with huge numbers of orders in a short space of time to cause delays. It was impossible to know just how widespread any of this was since the regulators, by their own admission, lacked the technology and expertise to monitor what was happening in their purview. There were also questions about what such a fundamental shift in the makeup of the markets might mean for stability. ‘What happens if a major event causes turmoil in the market? Will these HFTs simply shut down their computers and walk away since their model has been corrupted?’ wrote Joe Saluzzi from New York brokerage firm Themis in a strikingly prescient 2009 blog post. ‘Where will all that LIQUIDITY that they claim they provide go when the market doesn’t suit them? A major vacuum will be formed in the market as multiple parties run for a much smaller than expected exit.’

For day traders like Nav, there were more pressing concerns. HAL 9000. The Matrix. Skynet. Dolores. The existential threat posed by robots has been rooted in the human psyche since the dawn of computers. For Nav and his peers, the fear wasn’t that they would upend the financial order altogether, but simply that these ultrafast, highly sophisticated machines would be able to scalp better and more efficiently than they could, crowding them out of the market. A poster on one of the trading forums drily captured the prevailing mood. ‘One day, years from now, a trading desk will typically consist of three things. A man, a dog and a computer. The computer’s job will be to trade. The man’s job will be to feed the dog. The dog’s job will be to bite the man if he goes anywhere near the computer.’

The exact strategies HFT firms employed were diverse and constantly changing, but at the heart of many of them were three elements: an ability to predict which way the market was about to move; the speed to capitalise on that move; and a novel way of minimising losses when they guessed wrong. The first element involved statistically analysing changes in the order book and elsewhere for information that indicated whether prices would rise or fall. Inputs might include the number and type of resting orders at different levels, how fast prices are moving around and the types of market participants active at any time. ‘Think of it as a giant data science project,’ explains one HFT owner. For years, Nav had used his superior pattern recognition and recall skills to read the ebbs and flows of the order book until it became second nature, but even the most gifted human scalper is no match for a computer at parsing large amounts of data.

When it came to speed, the leading HFT firms invested hundreds of millions of dollars in computers, cable and telecommunications equipment to ensure they could react first in what was often a winner-takes-all game. Exchanges charged tens of thousands of dollars a month to allow customers to place their servers next to the exchange’s to minimise any lag in receiving data. The result was, in the words of Eric Budish at the University of Chicago Booth School of Business, a ‘neverending socially-wasteful arms race for speed’. Only the top-tier firms could afford to keep up, meaning barriers to entry were high. And the exchanges gave their most valued customers sweetheart deals that slashed their cost of trading to a fraction of other participants’. Point-and-click traders had no chance. By the time a human being had seen, processed and reacted to a buy signal or news of an interest rate cut, the market had entirely absorbed the information and any value had evaporated. Tried and tested arbitrage strategies, whereby traders look for two closely correlated securities to temporarily fall out of kilter and bet they will come back in line, were fruitless in the face of machines that could identify and profit from anomalies tens of thousands of times quicker than they could.

The final element of HFTs’ success was an understanding of the plumbing underpinning electronic markets. The CME’s platform, Globex, is what’s known as a ‘First In First Out’, or FIFO, market. That means that whenever a trader places a limit order (that is, an order away from the current price), it joins the back of the queue, behind any other orders at that level. If the best bid in the market is currently $99.00 and you want to sell when it reaches $100.00, for instance, your order will be placed last in line behind any other traders currently looking to sell at $100.00.

HFT firms monitor these queues for opportunities to benefit from what is essentially a risk-free option. Consider an example: HFT firm AGGRO decides the market is statistically likely to fall and so places an order to sell ten e-minis at the current price (the ‘best ask’), again let’s say $100.00. As AGGRO’s ten-lot order makes its way to the front of the queue, new orders join at the same price; by the time AGGRO’s e-minis are purchased, or ‘hit’, another one thousand lots are waiting in the $100.00 line for a buyer. At this point, there are two possibilities. If the market falls, as AGGRO predicted, the firm can buy ten e-minis at a lower price, say $99.50, and walk away with a profit. If it starts to appear, however, based on fresh information entering the order book, that the price is actually going to rise, AGGRO can quickly turn around and buy ten e-minis from somebody further back in the $100.00 line, exiting the trade without taking a loss. By consummating trades only when they knew they could extricate themselves with little or no loss when they got it wrong, HFT firms largely eradicated losses. They also helped create a situation in which, by 2010, the overwhelming majority of all orders on the CME were cancelled before they were consummated.

With all this to-ing and fro-ing, it’s easy to understand how day traders like Nav came to believe they were being targeted. Every time they placed or cancelled an order, even if it was only a handful of contracts, the market moved. ‘I remember clearly the first time I noticed the HFTs,’ recalls one of Futex’s senior traders from that era. ‘It was the start of a new year, we logged on, and the order book just seemed subtly but discernibly different, like an update on your phone or something. I was on a bank of twelve desks and we all just looked at each other and said, “What is going on?” And from then on it became much harder.’ At arcades around the world, algos became like bogeymen, blamed for anything and everything that went wrong. If a trader took a position and the market moved against him, it wasn’t a bad trade, it was the ‘fucking algos picking me off’. Rumours abounded about illicit deals between the exchanges and the HFT giants, but the truth was that the robots didn’t need to know their opponents’ identities to thrive. Fast machines, cheap commissions and probability were enough.

The ascendancy of HFT squeezed many human scalpers out of the market. Some adapted by trading over longer time horizons, leaving positions running for hours or days rather than seconds. Others took to actively seeking out and trying to exploit algorithms, which quickly became ubiquitous among banks and asset managers as well as HFTs. In 2007, Svend Egil Larsen, a self-described algo hunter from Norway, noticed a flaw in the way an entity reacted to trades in certain stocks and set about taking advantage. He made a modest $50,000 but was later charged, along with a colleague, with market manipulation. The alleged victim in the case was a broker called Timber Hill, one of a raft of companies owned by the Hungarian-born electronic trading pioneer Thomas Peterffy, a man whose personal wealth is estimated by Forbes at $17.1 billion. Larsen was originally found guilty and given a suspended sentence, but the conviction was overturned on appeal. ‘We feel like Robin Hood, or David beating Goliath,’ he told the Financial Times.

Most day traders harboured a degree of resentment towards the HFTs, but for Nav, who had a fierce antiauthoritarian streak, it tapped into something deeper. 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. Except, Nav was increasingly coming to believe, that wasn’t true. Like so much else in life, the players destined to win were the ones with the most money and the right connections. In reality, Nav didn’t know who his opponents were, and it would later transpire that some of those he complained about the most were actually gifted human scalpers with limited technology just like him. But to his mind, they were all cut from the same cloth: privileged elites with better equipment hell-bent on trying to take him down.

With his maths skills, his aptitude for pattern recognition and his lateral way of thinking, Nav might have made a highly prized employee for an HFT firm. Instead, he made a decision that, as an already successful and wealthy trader, he didn’t have to make. On 4 June 2007, after three years of silence, That’s a Fugazi filed a new post. It was titled ‘S&P 500 Futures Corruption’, and it read:

For all those that trade the e-mini S&P 500 with a ladder (where you can see the bids and offers), you must have realised now how some market participants have an unfair advantage over the rest. I’m mainly referring to the two spoofers … who are there every day and seem to push around the market. Now, I’m not one to complain about spoofing I mean hey it happens in every market, but these two S&P spoofers CANNOT BE HIT. I’ve tried many times gentlemen and they simply can’t. Hence, they contravene the rules, as per CME themselves and should be eliminated from the market … I’ve spoken to CME about this and they simply refuse to accept that it is going on, even though you only need to watch the ladder at any time during the day to see that it is. It’s a clear example of letting the big guys get away wth blue murder at the expense of the small guys.

The post went on to suggest that traders should consider boycotting the e-mini to force the exchange to take action before concluding:

I’m half thinking of asking CME directly how I can get the equivalent software which allows you to spoof without being hit, because I do a fair volume myself, but I feel it would be wrong. THE MARKETS SHOULD BE ON A LEVEL PLAYING FIELD FOR ALL.

Fugazi’s language was less combative than in his earlier posts, but still nobody replied. Four days later, he posted an update:

Oh one final caveat. I am working on a program on TT[fn1] to get the exact same cheating software. If you cant beat em you may aswell join em eh? Europeans have a pathetic attitude of accepting whatever authority throws at them – they never fight back. With the volume I do I know the exchange will turn a blind eye. And just imagine how easy trading will be since one is already cleaning up whilst playing by the rules. Tis been a sweet week.

There, on a popular public forum, Nav laid out the seeds of a plan that eight years later would culminate in his arrest for manipulating the market and helping cause one of the biggest intraday financial crashes in history. If anyone was paying attention, they might have been able to talk him out of it or notify the authorities. But, like the boy who cried wolf, he’d run out of credibility, setting him on a path disciples of Elliott or Gann might suggest he was destined to travel.

CHAPTER 6

END OF AN ERA

On a spring afternoon in 2008, traders at Futex returned from lunch to find Nav leaning back in his chair with his hands behind his head. For hours he didn’t touch his computer. A rumour made its way around the office: ‘He’s on strike.’

After five years, Nav had fallen out of love with Futex. He was fed up with the schlep to Woking and the distractions that awaited him when he got there. He was tired of begging for bigger limits. But most of all, he was sick of giving his money away. When he joined the arcade, he’d signed a contract agreeing that, in exchange for Futex staking him, he’d give up a share of his profits, a monthly desk fee and a commission on every ‘round-trip’. The profit split started at 50/50 and went up on a sliding scale depending on how much he had in his trading account. Now that Nav had accumulated more than £1 million ($1.6 million) he was entitled to 90 per cent of everything he withdrew, the maximum available.

For fledgling traders, Futex was an attractive proposition. They were given capital to try their hand and didn’t pay anything back until they were profitable. If they failed, as most did, they could walk away owing nothing. The flip side was that those who did make it subsidised everyone else. By now, Nav was routinely earning $50,000 a day, which meant giving $5,000 to the Rossis. And, with his frenetic style of trading, he could easily hand them an additional $2,000 in commissions. ‘A lot of these people, it was their first job, just out of uni, twenty-two, twenty-three years old,’ says one former trainer at Futex. ‘They keep them very much within those four walls, and because they’re down in Woking they rarely speak to anyone else within the City. But then they speak to other prop houses and realise what a shitty deal they have.’

Nav’s 90/10 split was generous by the standards of most other traders on the floor, but he wanted 95 per cent. When the Rossis refused, he shut down his trading software knowing he’d be severely crimping the company’s cash flow. It was the culmination of a feud that had been escalating for a while. A couple of years earlier, Nav had decided to quit trading FTSE 100 futures, the UK equivalent of the S&P 500 e-mini, where he was regularly making £2,000 a day, to try his hand at some bigger markets. After a shaky start, Paolo took Nav aside one day and suggested he go back to the FTSE. ‘Five hundred grand a year, that’s more than enough for you,’ Rossi said.

‘How do you know what’s enough for me?’ Nav replied, incensed that Paolo of all people would try to clip his wings.

On another occasion, Nav had gone home one night after placing a two-hundred-lot trade. The next morning, he was woken up by a call from Paolo telling him he’d lost a million dollars, virtually everything he had, he would later recount to a friend. Nav was shocked. ‘Just get me out,’ he said.

‘Nav, calm down,’ Paolo chuckled, according to Nav’s recollection, ‘you’re a hundred and twenty ticks onside!’ Nav’s overnight trade had earned him hundreds of thousands of dollars. ‘This is a lesson for you: always have a stop in the market. One of these days something like this will happen and you’ll get rolled over.’

It was an incredible result, but Nav couldn’t get past Paolo’s attempt to scare him into exercising better risk management. When he arrived at the office, he remembers marching into the owner’s room and shouting: ‘Are you still gonna take my money after that little escapade? Putting me through that and then charging me two hundred thousand dollars for it?!’ Nav was on an 80/20 profit split at the time. ‘What a wanker,’ he complained to the friend. ‘The guy’s got no shame.’

It didn’t help that Paolo was so blatant about how much money he had. Futex’s website had a page titled ‘Futex Lifestyle’, which could more accurately be described as ‘Paolo Rossi Lifestyle’. There were photos of Rossi at the Wimbledon final and watching Champions League football. Once, when his Ferrari had come back from the garage and the Lamborghini he’d been given as a replacement hadn’t yet been taken away, he posted a picture of them both with the caption ‘some tough choices’. One of his cars had the licence plate R9ssi and he was a member of Queenwood, one of the UK’s most exclusive golf clubs, where he shared the fairways with Hugh Grant, Catherine Zeta-Jones and golf pro Ernie Els. ‘All that material stuff is pointless and attracts the wrong people,’ Nav said to his colleagues with disdain. ‘Trust me. It’s a mirage.’

But Paolo wasn’t the only one displaying his success. In August 2007, a magazine called Trader Monthly published its annual ‘30 Under 30’ list of the most successful young traders. It included the following entry:

Legend has it that just outside London in the small, affluent city of Woking resides a pure prop trader who works two hours a day, two days a week – and still makes twice as much as anyone else at his clearing firm. The legend, it turns out, is true – and that gifted trader has the 30 Under 30-appropriate surname Young. ‘He wears jeans, his lucky jersey and no shoes,’ says one colleague. ‘He even puts on trades and sleeps at his desk.’

[Bradley] Young, an Aussie who spends more time on vacation than he does trading, has been known to pull down $250,000 a week even after the bosses at Futex exact their tribute …

Says Young: ‘From the very first day I traded a futures contract, I’ve always believed that I was going to be one of the greatest traders of all time. As each day passes and my career progresses, this belief becomes stronger.’

Trader Monthly was launched in 2004 and quickly became popular on trading floors around the world, mixing profiles of Big Swinging Dicks with articles on classic cars and how best to disguise one’s strip club receipts when claiming expenses. Like its readership, it was male, crude and brash. But the ‘30 Under 30’ feature took off and was frequently picked up by the mainstream press. CNBC interviewed inductees like they were celebrities. For Brad to be anointed was major kudos, even if the stuff about him barely turning up to the office was untrue.

A couple of months later, Nav emailed the editor:

Good evening,

I have recently been introduced to your magazine and must congratulate you, since it is one of the better publications I have seen on the art of trading. I read with interest your top 30 under 30 list and was wondering what criterion someone would need in order to be part of it. I am a local who works on a 90/10 split. I trade the e-mini SP 500 and on volatile trading days I do on average 10,000 round turns or about 1% of the SP 500’s total daily volume. If I trade well on a volatile day I normally make circa $133,000. On quiter [sic] days I look to make between $45,000 and $70,000.

It’s been an extraordinary year in my trading career. You must understand that for me to be in the top 30 is not a vanity thing. I prefer to keep a low profile and indeed hide my P&L’s from my trading colleagues. However, I am looking to set up a trading arcade of my own and maybe the publicity would be a good thing for the arcade. Maybe we can do something in the future.

Best regards,

Navinder.

Nav never did feature in Trader Monthly, and he didn’t start his own arcade, but he was beginning to outstay his welcome at Futex. Once a major generator and a great advertisement for the firm, he was increasingly looking like a liability. He came to the office less and less frequently, and when he did turn up, he caused trouble. At one point, he complained that his bank was stealing money from his trading account. When the Rossis told him he was mistaken, he questioned whether they were in on it. Nav’s nosebleed stakes were giving management sleepless nights and, if he took home any more than 90 per cent of his profits, the economics no longer stacked up. Earlier in the year Nav had paid to ‘lease a seat’ at the CME – essentially, a form of membership with privileges – which slashed the fees he paid the exchange per trade, in turn eating into Futex’s commissions. The firm also suggested it had received warnings from Her Majesty’s Revenue & Customs that Nav wasn’t paying his taxes.

Matters came to a head in the summer of 2008 when Nav told Futex he was leaving and wanted his capital, a sum of around $3 million. At first Paolo resisted, telling Nav he’d return the money in installments until he was confident the tax authorities were happy. When Nav instructed a lawyer to begin legal proceedings, Paolo caved, but ties between the two men were severed for good.

‘At the best point our relationship would have been mentorstudent, at the worst point you’re dealing with a mentality that if you hold him back, he feels like you’re against him,’ says Rossi. ‘If you don’t give him the limits he wants, you’re against him, if you’re taking a clearing fee, you’re against him. He’s got this mentality that everyone is ripping him off. But we nurtured him and at Futex he knew everyone. It was like a brake on his worst instincts. When he left there was no one to look out for him.’

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