Flash Crash, by Liam Vaughan

Interview: Flash Crash Author Liam Vaughan

The definition of a Flash Crash is “a very rapid, deep and volatile fall in security prices occurring within an extremely short time period”, and this is exactly what happened at 7:41pm (1:41pm Chicago) on the 6th May 2010.

A fall which, four years later, would lead to the arrest of a little-known trader who on the day of the crash placed orders in the region of $3.4 billion, trading from his parents’ house in the outskirts of London.

Some called one man’s orders being placed in the market ‘statistically insignificant’ to be able to move the markets seen on the 6th May whilst others called it a ‘comical’ idea. The man in question was making tens of millions, yet still went to work on a scooter and seemed to treat trading like a game with a high score.

But whether Navinder Singh Sarao (Nav) caused the 2010 flash crash or not, Liam Vaughan, author of The Fix and now Flash Crash digs deep into Nav’s story and investigates the circumstances surrounding the trillion dollar drop in the financial markets that day.

After reading the book, highly entertaining and with great twists and turns, we caught up with Liam to talk about his new book and the story of the ‘Hound of Hounslow’.

Liam Vaughan

1. Can you tell us briefly what your background is and how you ended up being an investigative writer?

I’ve been a financial journalist for about 15 years. At first, if I’m honest, it was just because the money was a tiny bit better, but then the 2008 financial crisis hit and suddenly markets and finance became the big story. After joining Bloomberg in 2011, I covered a bunch of banking scandals and found that I just loved the investigative stuff: spending months on a story, digging deep, writing something engaging and hopefully shining a light on a secretive world.

2. How do you know you’ve found a good story to investigate? How do you discover these types of stories?

There are a number of things that can make a great long story: Does it uncover a scandal? Does it tell us something about the wider world? And are there interesting characters and events? Is it surprising? The best stories have all of these elements. Without storytelling and compelling characters, financial journalism can be quite dry.

3. You were part of the investigation of the rigging of Libor and covered it in your book The Fix. How do you go about researching & investigating these interesting scandals?

Writing a book is a very long, evolving process. My approach is to spend the first few months gathering documents, compiling an exhaustive list of people and trying to conduct as many interviews as possible. Then I create a structure and start writing. One of the biggest challenges, as you can imagine, is convincing people to talk to you. And you have to have enough passion for the story to get you through the inevitable tough spells.

4. Can you briefly introduce your new book Flash Crash and tell us a little of what it’s about?

Flash Crash tells the story of Navinder Singh Sarao, the British day trader who made $70 million from his bedroom and was accused by the US government of helping cause the May 6th 2010 flash crash, when stocks suddenly plummeted 5% in four minutes.

5. How did you come across Navinder Sarao’s story? And can you explain what motivated you to make the decision to write a book about his story?

I was working as a reporter at Bloomberg when Nav was arrested in 2015, and I just remember thinking it was such a crazy story -- the idea that a kid in his bedroom could upend the global financial markets. I got lucky because it turned out that an old friend of mine - a trainer known as ‘Trader Dante’ - used to sit next to Nav at the first prop firm he worked at, Futex. He regaled me with all these stories, about how Nav used to drive a moped, live on McDonalds, wear a tracksuit and take positions worth hundreds of thousands of pounds and I was hooked. Later, I found out that Nav had entrusted all his money to a series of unscrupulous investors, and I knew someone had to write a book.

6. Nav’s attitude to risk, ability to detach his emotions from trades (‘if you don’t care about the money it’s easier’) and his laser focus seemed to be the secret to his success. However, taking on large amounts of risk and not having a stop loss is seen generally within trading as reckless. Where do you think Nav got this attitude from? Was he taught it or was it just him?

I think Nav was born with a set of attributes that made him a brilliant trader. He could concentrate intensely for hours, had lightning fast mental arithmetic, a photographic memory and fast reflexes. Most of all, as you say, he just had a completely ice-cold attitude to risk. Money literally didn’t mean anything to him, so he was able to put his money on the line when he had conviction. Some of his trades could definitely be considered reckless, and there’s no doubt he could have lost it all and there’d be no book. But that’s what makes him Nav!

7. There are numerous opinions on whether one person could cause this type of crash, especially as Nav isn’t the only participant in the market deploying these strategies. “The simple idea that a chap in West London, playing around at home with an off the shelf algo programme ... can up end the entire US equity market is comical” wrote one FT journalist following Nav's arrest. The NYT published a piece titled ‘The Trader As Scapegoat’. Do you think Nav just got unlucky in being identified as the likely person to cause the crash?

I don’t think it’s accurate to say he was a scapegoat because the SEC and CFTC had already published a report essentially pinning the flash crash on a large fund called Waddell & Reed. If anything, it would have been easier for them to not bother going after Nav at all. But there’s definitely a big question mark over the extent to which he caused or even contributed to the crash at all. I try and steer clear of making a judgement myself. I present all sides of the argument and let the reader form their own opinion.

Buy Flash Crash, by Liam Vaughan

8. It wasn’t until four years after the crash that the authorities opened up the case again to pursue Nav. Do you think if Nav hadn’t been caught there was the potential that he may have accidently caused another flash crash?

It’s a good question. The only reason they caught Nav is because a whistleblower came forward who spotted his spoofing. If that hadn’t happened, the government would be none the wiser and Nav would likely still be trading and making millions. As to whether he would have caused a crash, I’ll let other people speculate!

9. There is an interesting section in the book which talks about whether those programmers coding the algorithms for traders like Nav should be held responsible for the effects they have in the market or not. Nav’s programmer in the end wasn’t prosecuted, what’s your viewpoint on this?

Nav relied on various programmers to make his algorithms, including a guy called Jitesh Thakkar who was criminally charged but later acquitted. Thakkar’s lawyer used the analogy of a car salesman who inadvertently sells a getaway car, but I think it’s more akin to making a weapon that is used for violence. The key question is how much did the programmer know? And did they ask the right questions to try and find out their client’s intentions? You can’t just stick your fingers in your ears and take the money.

10. Nav’s personality is an interesting one. He made multiple millions but never told family or friends how much he made, he rarely took up offers of free entertainment by his brokers, and he never bought any major materialistic things. Yet he was still so driven to accumulate wealth. What were his key motivations and his ultimate goal?

Even after two years working on the book, Nav remains something of an enigma to me. I honestly think that he was totally obsessed with trading, and saw money as like a high score. If he’d taken it out and spent it, suddenly the game would become reality and he’d have to face the consequences of what he was doing. A fascinating aspect of his personality is that he didn’t seek or need external validation. He wanted to be a great trader to prove to himself that he could do it.

11. Nav left Futex and went out on his own in 2008, where the extreme volatility benefited him. Do you think he would have eventually made it big even without the financial crash?

Absolutely. Nav was a great trader regardless of the crash. He was already worth more than £10m when he hired the first programmer to build the spoofing algo in 2009.

12. The CFTC investigators, Harris and Le Riche, actually joked about who would play them in the movie when they were building this case. As it goes, it is being turned into a Hollywood movie. This is exciting news, how did this come about? And will you be working on the script?

It was very surreal. Dev Patel saw an early copy of the book, loved it, and signed on to play Nav. After that some big producers came on-board. There’s a separate screenwriter but they’ve involved me a lot, which has been amazing. Fingers crossed it gets made. I’m optimistic it could be one of the great trading movies.

13. What are your thoughts on the current market conditions caused by the Covid-19 pandemic; do you think it would have suited Nav’s strategy playing into volatility?

100%, Nav would have relished all the volatility in the market. He lived for these conditions. Unfortunately, he’s banned from trading US futures, but you never know - maybe his brother’s account has suddenly been getting some big wins!

14. What are your plans for the future - have you got your eye on another exciting topic to write about?

I’ve got my eye on a few other topics but nothing is set in stone. As long as traders do cool or dangerous things, they’ll always be stories for me to write.

Follow Liam on Twitter @liamvaughanBBG or via his website www.liamvaughan.co.uk.

WIN A SIGNED COPY OF FLASH CRASH!

-- NOTE: THIS COMPETITION IS NOW CLOSED --

For the chance to get your hands on a signed copy of the book, simply answer this question. The winner will be drawn Friday June 26th and notified by email.

Question: In the Flash Crash of 6th May 2010, by what percentage did the market crash in the space of four minutes?