LONDON/CHICAGO - A British man accused of market manipulation that contributed to the May 2010 Wall Street "flash crash" said he opposed being extradited to the United States, while the operator of the market where he traded sought to rebut prosecutors' suggestion that futures helped cause the crash.
Bail for Navinder Singh Sarao, 36, was set at 5 million pounds (US$7.5 million), along with other conditions. He will remain jailed in London for at least one more night, until he raises the bail.
Sarao's bail hearing was his first appearance since the US Justice Department charged him with wire fraud, commodities fraud and market manipulation over a period of several years.
"This has come as a bolt from the blue for Mr. Sarao," his lawyer Joel Smith told the court.
Sarao is accused of using an automated programme to "spoof" markets by generating large sell orders that pushed down prices. He then cancelled those trades and bought the contracts at the lower prices, reaping a roughly $40 million profit on his trading, US authorities said.
The flash crash saw the Dow Jones Industrial Average briefly plunge more than 1,000 points on May 6, 2010, temporarily wiping out nearly $1 trillion in market value.
In its complaint, the Department of Justice said Sarao's activities "contributed to the order book imbalance" that was a factor in the flash crash.
CME Group Inc, where Sarao conducted his trades, said on Wednesday in a statement that "the Flash Crash was not caused by the futures market." The exchange added that it was prohibited by law from releasing any information about his trading as well.
The case marks the first time US authorities have alleged that illegal activities played a role in the crash, which markets regulators said in October 2010 had been caused by various factors, including a computer-driven trade by a mutual fund which chose to sell a large number of E-mini S&P 500 futures contracts.
"This changes the findings, the history of the flash crash," said Robert Engle, finance professor at NYU Stern School of Business, who was on the committee that investigated the flash crash.
Sarao was first contacted in 2009 by regulators who questioned his trading activity, but the "spoofing" he engaged in continued until recently, according to the US Commodity Futures Trading Commission. Sarao had been a member of the CME Group, where he traded stock futures, since May 2008.
The head of the CFTC said on Wednesday that it took nearly five years to charge Sarao because of the size and complexity of US financial markets.
"These are huge markets," Chairman Tim Massad said at an industry conference in Chicago. "There's a lot going on."
But others said the long delay raised questions about regulators' ability to pursue improper market activities.
The failure to find Sarao's alleged misconduct was "a negative for the CFTC's investigation at the time," Engle said. "They were looking for this sort of activity, but they didn't find it."
The case in the end was brought with the help of an anonymous tipster who could now potentially reap millions of dollars under a federal whistleblower award programme.
Aaron Watkins, representing the US judicial authorities at the London hearing, told the court Sarao had worked as a trader from his home operating primarily through a company he set up to trade futures using commercially available software.
"On numerous occasions ... Mr Sarao is alleged to have spoofed the market," he said.
Watkins also said that Sarao had been asked to stop by US authorities but continued his activities, knowing they were wrong.
Sarao bought his CME seat on May 8, 2008 for $435,000, according to a member newsletter published at the time. Traders do not need seats to trade on CME, but having a seat entitled him to buy and sell stock futures and options for cheaper fees than he could have done had he not owned his own seat.
ARRESTED AT HOME
Sarao was arrested at the home he shares with his parents, a modest suburban house under the flight path of nearby Heathrow airport.
Sarao appeared calm in his first appearance at Westminster Magistrates' Court. Wearing a yellow sweatshirt and white tracksuit bottoms, Sarao spoke quietly to confirm his name, address and date of birth.
"I suspect the last 24 hours have been somewhat dramatic for you," District Judge Quentin Purdy told Sarao at the end of the hearing. "But you now know the US seeks your extradition on very serious charges."
His lawyer declined to answer questions from reporters about his response to the US allegations.
The next court hearing in the case is scheduled for May 26, with a full extradition hearing to follow on Aug. 18 and 19.
The court heard that Sarao had 100,000 pounds in various betting accounts and another 5 million pounds in a personal trading account of which 4.7 million pounds was a loan.
The family's neighbours in Hounslow said they had never seen any outward sign of unusual wealth, and the court hearing did not shed any light on the existence or whereabouts of such a large amount.
Credit Suisse UK had a security agreement with Nav Sarao Futures, Sarao's company, the first confirmation of an external institution providing financing to Nav Sarao.
Smith told the court Sarao was born and raised in Britain and had attended Brunel University in London. He had worked for banks before becoming an independent trader.