Key Messages
The Story Of The Flash Crash: How A Young Man Crashed Global Markets From His Childhood Bedroom
On May 6, 2010, the financial markets crashed in an event known as the Flash Crash.
It sent shockwaves through the economy and left economists baffled about what had happened as to how this could have occurred.
Navinder Singh Sarao was identified as the possible trigger behind this crash after it was discovered that he had designed a program that could outsmart the markets.
Through these sections of Flash Crash, you’ll learn how a young British man single-handedly caused a global market crash from his childhood bedroom, what trading futures means and algorithms overtaking human traders and it also provides insight into how a stock market crash like this can happen.
This book is a must read for anyone who wants to learn more about the freak stock market crash of 2010 and everything else related to it.
On May 6, 2010, Something Extraordinary Happened In The Global Financial Markets – The Fastest Drop Ever Seen
In 2010, the financial world was stunned by the fastest ever drop in global financial markets – it occurred so quickly that even experienced market traders had trouble keeping up.
At 1:41 p.m.
Central Standard Time on May 6th, the S&P 500 index dropped 5 percent in four minutes, while the Dow Jones index plummeted further than it ever had in its 114-year history.
What made this crash so unique was how many markets across the globe were simultaneously affected; Shanghai to Frankfurt felt it strongly and individuals stocks fell drastically – creating stock charts that appeared like sheer cliff faces.
The Chicago Mercantile Exchange even triggered their automatic stop-logic to halt trading for five seconds before resuming again and climbing back up
Experts couldn’t figure out what brought about such chaos, especially as some shares collapsed to almost nothing while others such as Apple and Sotheby’s shot up astronomically.
What is more shocking is that ordinary people around the world lost an immeasurable amount of money from it all; Mike McCarthy from South Carolina had just inherited a small stock portfolio before watching his losses amount to $17,000 when trying frantically to sell his holdings during the dip.
Navinder Singh Sarao: The Little Known, Gifted Trader At The Heart Of A Global Mystery
The mystery surrounding the infamous Flash Crash of 2010 had left US authorities scratching their heads in search of a culprit.
Little did they know, the answer was right in front of them in the form of gifted but little-known trader Navinder Singh Sarao.
Nav, who was born into a working class family in Hounslow, London and emigrated from India with his parents during the late 70s, showed an unusual talent for math at an early age.
His ability to multiply long numbers in his head without having to use pen and paper impressed even his school teachers.
When he went on to study computer science and math at Brunel University, it became apparent that Nav had an affinity for trading, as one of his housemates always seemed to have cash on him through trading activities.
This sparked an obsession within Nav that lead him eventually land a job at Independent Derivatives Traders (IDT).
At IDT Nav was able to further hone his trading skills and put his brilliant mathematical brain to work; he quickly became one of IDT’s best assets, earning tons of money by successfully trading futures contracts on the S&P 500 index markets.
It didn’t take long before people knew not to bother Nav while he worked – after all why would anyone want to interrupt one of their greatest assets!
Nav, A Brilliant Futures Market Speculator, Faced A New Rival: High-Frequency Trading Technology
Nav, a brilliant futures market speculator, was making waves in IDT back in the day.
While most of his peers were focused on flaunting their wealth, Nav kept it low-key, consuming nothing but McDonald’s Fillet-O-Fish sandwiches and rocking the same cheap sweaters to work.
Unbeknownst to them all was that Nav was racking up massive profits for himself and Futex, which had recently acquired IDT.
The way futures markets work has changed since then.
Initially created to allow companies to hedge against risk by setting predetermined prices on goods, these financial contracts are now being used by speculators as a bet on assets like gold and stock market prices.
This is because high-frequency trading (HFT) progressed significantly since then; using powerful technology and complex algorithms to analyse market movements almost faster than humanly possible.
Nav’s impressive understanding of futures markets became increasingly difficult with HFT looming over his technique; pushing him out of the game with its hefty investments and relentless speed.
Many traders today use HFT as a primary method of investment, rendering those like Nav obsolete.
Still, he remains one of the greatest traders ever seen in this industry – facing off against competitors powered by machines!
Nav, A Talented Trader Accustomed To Making Money In The Futures Market, Finds Himself At A Disadvantage When Powerful Traders With Access To State-Of-The-Art Computer Technology Start Outsmarting Him
Nav, a talented trader was growing increasingly frustrated with the technology being used in high-frequency trading.
This kind of trading was outgunning him, responding in millionths of a second to new information compared to his reaction time which is only a fifth of a second.
Prices seemed to move against him no matter what bids he made, as if some invisible power was reading all his moves and manipulating the market against him.
Having grown up from a working-class background, Nav had faith that as long as you’re talented enough and tried hard enough, you can make money from the stock market.
But this advancement in technology has rigged the system in favor of those who have access to it such as big hedge funds.
So, Nav decided to take matters into his own hands by devising a way to game the system.
He reasoned that while these cutting-edge computer programs could read the existing data, they couldn’t predict or anticipate any data that he himself would influence – so he set out to do just that with help from a computer programmer and eventually created an Autotrader program.
The Story Of Nav, The Unknown Programmer Behind The 2010S Stock Market Crash
After the Flash Crash of 2010 on the stock markets, US authorities sought to uncover the cause of this mysterious crash.
Rumors ranged from a terrorist attack to mistakes made by an individual trader, but eventually officials settled on a mutual fund called Waddell & Reed as the culprit.
Even though this seemed logical enough, one anonymous trader in Chicago, Mr.
X, felt that there was something else at play.
After painstakingly analyzing data from the crash with his own software, he concluded that it must have been caused by a single entity—but a financial institution rather than a lone individual.
The Commodity Futures Trading Commission began digging deeper into the matter and eventually tracked down an entity called NAVSAR back to the semi-detached house in Hounslow where Nav lived with his family.
It took five years for US authorities to track down Nav as the culprit suspected of crashing the markets and when they finally did arrive at his door, Nav was asleep in his bedroom wearing only his usual tracksuit pants and sweater!
Overall, authorities were slow to come to the conclusion that Nav was responsible for crashing the markets due to multiple theories being thrown around and months of investigation by Mr.X before they had been able to accurately track down this perpetrator.
The Navinder Sarao Case: Hero Or Villain?
The Navinder Sarao case raises a lot of questions about the world of finance.
Was Nav really responsible for the Flash Crash? Was spoofing really such a bad thing? How did this affect the market? And was Nav a hero or villain in the end?
The first question is whether or not Nav actually caused the Flash Crash.
It’s been argued by experts that his actions weren’t statistically significant enough to lead to the crash.
Next, it’s worth asking if spoofing is unethical and should be forbidden, as it has been since the Flash Crash.
One noteworthy trader argued that spoofing balances out high-frequency traders, who damage all other traders with their powerful algorithms, and makes markets fairer for everyone else.
Finally, what are people’s opinions on Nav after understanding his story? Many traders see him as an inspiration – a little guy taking on powerful hedge funds – while others view him as a common thief who was only after money for himself.
Wrap Up
The Flash Crash: A book summary of the lasting effects Sarao’s actions have had on our world of finance.
Navinder Singh Sarao was a mathematical genius from London who made a career for himself trading futures.
His mission? To outsmart the relentless fast-paced automated high-frequency traders he was competing against, and to do so, crafted an incredibly smart computer program.
And it worked!
Unfortunately, his success may have inadvertently contributed to the global market collapse that followed due to his work – with far reaching effects as we know them today.
From algorithmic trading, involvement in national exchanges and unravelling flash crashes – it all started with one man and a simple program, created with purposeful intent.
In essence, this is what The Flash Crash book is ultimately about.
