AlphaMind Podcast Episode 48 - Flash Crash : Liam Vaughan talks about his book about Navinder Sarao and the 2010 Flash Crash.

The story of Navinder Singh Sarao is one of the most incredible stories ever to come out of Financial Markets. 

A young man who amasses a $70,000,000 fortune day trading stock markets, who is accused of causing the biggest Stock Market Flash Crash in history, is then the subject of a major US govt investigation and a multimillion-dollar manhunt. And all this done on his home computer, from his upstairs bedroom, in his parent’s modest house, in a very ordinary West London suburb, without his parents, family or friends having a clue.  

Sarao, never had the trappings of wealthy financial market participant. He ate from McDonalds, wore cheap track-suits, didn't take fancy holidays, of have a flash car, that is if you do not count his yellow bicycle he jokingly called his Lamborghini.

The Book

Sarao’s story is brilliantly captured by this week’s guest on the Podcast Liam Vaughan. Vaughan is a Bloomberg journalist and author of the book about Sarao, ‘Flash Crash: A Trading Savant, a Global Manhunt and the Most Mysterious Market Crash in History.’

Vaughan’s brilliant book tells how Sarao first came to become involved in the markets as a day trader. He also describes Sarao’s extraordinary gifts which made him so successful well before he started the trading activities which were to subsequently bring him down. 

The book goes beyond Sarao’s story, telling the story of the Flash Crash which revealed some major flaws at the centre of how futures markets functioned, and presented a detailed argument of the role played by high frequency trading and the advent of electronic order books. 

‘Flash Crash’ also tells the story of the rise of modern trading. It traces the roots of the current markets back to the frantic and sometimes dubious trading activities which took place in the alleyways and coffee houses of the City of London dating back to the 1700s.   

Vaughan goes on to describe the original physical locations where open outcry futures trading was practiced and how this attracted a certain type of individual and style of trading. He explores the transition to the modern electronic markets, and how different skills, abilities and characteristics were required for success in these new market environments. 

There is a subtext to Vaughan’s book, which is how those with power and money were able to influence the path the investigation into the Flashcrash. It describes how finding a scapegoat in the little man 'Sarao' enabled those with the power and influence to continue largely unaffected by some of their own dubious activities.

I cannot help thinking that there is a red-thread which can take this theme back through many cases of wrong-doing in financial markets, even back to Nick Leeson, (Our guest on an earlier episode). Often the fault really lies with the system and those higher up in the food chain, but the buck is passed to a scapegoat, and outsider, someone who was in the wrong place at the wrong time who must carry the can.   

There is something in Vaughan’s style which reminds me of Michael Lewis. He possesses that ability to take complex and often very dry subject matters and explain them in ways which those unfamiliar with the subject could follow and remain engaged with. This is the art of the financial market storyteller, relating complex ideas to a broad audience and yet not diluting them so much that they lose their meaning.

The Podcast Episode

In this interview, we discuss with Vaughan a wide range of themes connected to this remarkable story, including:

- How Sarao, who it was found suffered from Asperger's Syndrome, had grown up obsessively playing computer games, which may have come to be a major advantage to screen-based trading.

- The paradoxes in Sarao’s character traits and how these supported his success as a trader but at the same time left him vulnerable in other areas of his life.      

- How Navinder’s gifts and mental attributes, seen by some as learning difficulties, probably worked in his favour in his trading activities. 

- How Navinder’s mindset, again possibly prompted by his mental state, including his very different relationship with money, which may have contributed to his fearlessness and his trading style. 

- How his obsession with trading and the desire to win may have led him down unhealthy paths, and how on reflection the money and rewards never produced the satisfaction he needed.  

- Having a grudging admiration for what Sarao achieved, and how even though his activities were considered illegal ultimately it exposed flaws in the markets system which existed and which Sarao was able to brilliantly exploit. 

- How the laws changed after Sarao commenced his spoofing activities and after the Flashcrash. 

- The degree to which his activities were illegal or improper, particularly considering how the electronic futures system itself had made it possible with the advent of electronic trading. 

- How Navinder’s activity exposed the frailties within the Electronic Futures Trading system and how new platforms increasingly developed the ability to manipulate markets. 

- How Navinder had felt the market was rigged against him by other people who had unfair advantages, including other spoofers and HFT traders. 

- We debated whether his activities followed the failure of the authorities to act on his complaints about the activities of others, and whether by ignoring them they effectively green-lighted his activities. 

- The huge gulf which exists between the resources and level of expertise in those regulating and policing trading activities and those of the firms and people engaging in activities in markets.

- The importance of balance between your trading activities, and the other parts of your life.  

- Whether Navinder was ultimately a victim in this story. 

Episode Links:

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The AlphaMind podcast is co-hosted by Steven Goldstein and Mark Randall, market veterans with over seven decades between them in the financial markets.

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