November 17, 2016

Federal Court in Chicago Orders U.K. Resident Navinder Singh Sarao to Pay More than $38 Million in Monetary Sanctions for Price Manipulation and Spoofing

Sarao Admits to Contributing to Extreme Order Book Imbalance and Causing and Creating Artificial Prices on Multiple Days, Including May 6, 2010 (Flash Crash Day)

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Andrea R. Wood of the U.S. District Court for the Northern District of Illinois entered a Consent Order against Navinder Singh Sarao (Sarao) that requires him to pay a $25,743.174.52 civil monetary penalty and $12,871,587.26 in disgorgement.  The Court’s Order also permanently prohibits Sarao from further violations of the Commodity Exchange Act (CEA) and CFTC Regulations, as charged, and imposes permanent trading and registration bans against Sarao.

The Court’s Order arises from a CFTC enforcement action filed against Sarao, along with his company Nav Sarao Futures Limited PLC (Defendants). The CFTC charged them with unlawfully manipulating, attempting to manipulate, spoofing, and use of a manipulative device — all with regard to the E-mini S&P 500 near month futures contract (E-mini S&P) that trades on the Chicago Mercantile Exchange (CME) (see the CFTC Complaint and Press Release 7156-15, April 21, 2015).  The E-mini S&P 500 is a stock market index futures contract based on the Standard & Poor’s 500 Index and is one of the most popular and liquid equity index futures contracts in the world.

CFTC Director of Enforcement Aitan Goelman commented:

“As this case makes clear, the dangers of spoofing are real.  Mr. Sarao's spoof orders distorted prices in the E-mini time and time again over a period of years.  In so doing, his orders hurt real market participants.  Equally as clear is our resolve to root out this behavior and bring those responsible to justice, wherever they may be.”  

In the Order, Sarao admits to the allegations in the CFTC Complaint, as well as to the Order’s findings of fact and the conclusions of law. The Order finds that Sarao:

• successfully manipulated the E-mini S&P on at least 12 days between April 27, 2010 and March 10, 2014 (including May 6, 2010, commonly known as Flash Crash Day);



• attempted to manipulate the E-mini S&P tens of thousands of times between April 2010 and April 17, 2015;



• placed tens of thousands of bids and offers that he intended to cancel before execution (i.e., spoof orders) between July 16, 2011 and April 17, 2015; and



• employed or attempted to employ a manipulative device, scheme, or artifice to defraud in connection with his spoof orders between August 15, 2011 and April 17, 2015.

The Order finds that Sarao engaged in a scheme to manipulate the price of the E-mini S&P utilizing a variety of automated and manual spoofing tactics designed to cause price swings that Defendants could exploit through their trading. For example, Defendants used a dynamic layering program that routinely placed 4 to 6 exceptionally large sells orders into the E-mini S&P order book, each one price point from the next, beginning at least 3 or 4 price points away from the best asking price. As the market price moved, the program automatically and simultaneously modified the orders at the various price levels, resulting in Defendants’ orders generally remaining at least 3 or 4 price points away from the best asking price in the order book. Often, these large layered orders were modified hundreds of times to keep them from resulting in executed trades, before eventually being cancelled. Defendants also sometimes employed a back-of-queue program that placed large orders in the order book to affect prices, but minimized the chances that such orders would result in executed trades by taking advantage of the CME matching functionality. Further, according to the Order, Defendants utilized manual spoofing techniques to place and cancel large orders with no intention of execution.

According to the Order, Defendants placed thousands of E-mini S&P spoof orders to create a materially false and misleading impression of supply and demand to induce other market participants to react and buy or sell E-mini S&P contracts at prices, quantities, and/or times that, but for Defendants’ spoofs orders, these other market participants would not have traded. Further, the spoof orders had the purpose and effect of artificially depressing or artificially inflating E-mini S&P market prices when the spoof orders were active. Frequently, after causing these artificial prices, Defendants executed orders that benefited from these artificial prices.

Flash Crash Day (May 6, 2010)

Defendants admitted to aggressively using the dynamic layering program and other spoof orders on May 6, 2010, according to the Order. More specifically, the Order finds that Defendants used the dynamic layering program for a cumulative time of over 4 hours and 25 minutes on the Flash Crash Day. The program placed orders that were modified over 81,000 times that day, with only 81 lots resulting in executed trades. Before being cancelled at 1:40 p.m. CT, the orders represented approximately $170 million to over $200 million worth of persistent downward pressure on the E-mini S&P price and represented 20-29% of the entire sell-side of the order book. Further, Defendants placed additional resting spoof orders in the order book to exacerbate the effects of the dynamic layering program. The Order also finds that Defendants’ actions contributed to an extreme order book imbalance in the E-mini S&P market and that the CFTC’s and Securities and Exchange Commission’s Preliminary Findings Regarding the Events of May 6, 2010 noted that the significant imbalance between sell orders and buy orders contributed to a sudden loss of liquidity in the E-mini S&P market that day and that this loss of liquidity, in conjunction with other market events, directly contributed to the E-mini S&P price crash.

Related Criminal Action

Last week, Sarao pleaded guilty in the U.S. District Court for the Northern District of Illinois to one count of spoofing and one count of wire fraud in a related criminal action.  

The CFTC Division of Enforcement staff members responsible for this matter are Jeff Le Riche, Jo Mettenburg, Jenny Chapin, Allison Sizemore, Carlin Metzger, Elizabeth Padgett, Mary Lutz, Jordon Grimm, Rick Glaser, and Charles Marvine, as well as former Division of Enforcement staff member Jessica Harris. 

The CFTC thanks and acknowledges the assistance of the Chicago Mercantile Exchange, the U.S. Department of Justice, the Federal Bureau of Investigation, the U.K. Financial Conduct Authority, the Guernsey Financial Services Commission, and the Metropolitan Police International Assistance Unit, Scotland Yard.  The CFTC also recognizes the cooperation of the Securities and Exchange Commission.

Media Contact
Dennis Holden
202-418-5088

Last Updated: November 17, 2016