Navinder Sarao Pleads Guilty to Spoofing

Emily HayesCase Studies, Market Rules & Responsibilities


On Wednesday, November 9, 2016, Navinder Sarao pled guilty to spoofing and wire fraud before Judge Virginia Kendall in the Northern District of Illinois. After unsuccessfully fighting his extradition from the UK, Sarao became the second person found liable for violating Dodd-Frank’s anti-spoofing statute after Michael Coscia was convicted last year.

As part of his plea agreement, Sarao admitted to manipulating the market for E-Mini S&P 500 futures on the CME between January 2009 and April 2014, placing thousands of E-mini orders that he intended to cancel before they were executed. The Department of Justice had also alleged that Sarao’s trades led to the Flash Crash of May 6, 2010; however, Sarao did not admit to this specific allegation in the plea agreement.

According to the terms of the plea agreement, Sarao will pay approximately $12.8 million in disgorgement, representing the government’s estimate of the profit Sarao realized from illegal trading strategies. The charges to which Sarao pled guilty carry a maximum penalty of thirty years’ imprisonment, with a sentence of 78 to 97 months anticipated based on advisory sentencing guidelines.

On the same day, Sarao agreed to settle with the CFTC over that agency’s civil spoofing charges. If Judge Andrea Wood of the Northern District of Illinois confirms the proposed settlement agreement, Sarao will be permanently banned from trading and will pay a civil penalty of approximately $25.7 million.

In his plea agreement in the criminal case, Sarao admitting to spoofing the market by using four different methods. First, Sarao employed a “layering” technique. Sarao would usually place a block of 5 sell orders for E-mini futures simultaneously and at several different price points, all above the market sell price at that moment. The block of sell orders moved in unison with the fluctuation of the market so that the orders would always remain above the market sell price. According to prosecutors, this choreographed movement of Sarao’s sell orders significantly reduced the likelihood of their execution, even as the orders conveyed a false impression of elevated supply just above the current market price. This apparent increase in supply allegedly drove prices for E-mini futures contracts down and allowed Sarao to profit, mitigate a potential loss, or open or liquidate his position at a more favorable price.

Second, Sarao used the “back of queue,” or “modify-up,” function to minimize the likelihood that his spoof orders would be filled. Taking advantage of the exchange’s system for setting priorities among orders entered at the same price, Sarao would modify one of his existing orders by adding one contract to the order when another market participant would place an order at the same price. Under CME rules, this modification would revert Sarao’s order to the back of the book behind other orders entered at that price point, thus reducing the likelihood that Sarao’s orders would be executed. According to the DOJ, Sarao used this automated scheme to create a false sense of supply in the E-mini futures market that induced market participants to react to his benefit.

Third, Sarao manually placed one or more 2,000-lot orders – the largest order size allowed on the CME for E-mini futures contracts – in a fashion that prosecutors argue illegally distorted the market. Sarao would place these orders at the best buy or sell price to induce market participants to enter orders they otherwise would not place. Sarao then placed orders he intended to execute on the other side of the market and cancelled his original 2,000-lot orders.

Lastly, Sarao manually placed “resting orders” in quantities of hundreds of lots at least one or two levels away from the best bid or offer. Sarao placed these resting offers often in combination with other spoof orders and then traded genuine orders on the opposite side of the market. He then cancelled his resting orders. The DOJ contends that Sarao used these manual orders, as well, to create a false sense of supply or demand in the E-mini futures market that induced other market participants to react to his benefit.

Following his plea, Judge Kendall released Sarao on $750,000 bail and allowed him to return to the UK for the time being. The court set a status hearing for February 6, 2017 to decide on a sentencing date.

Emily Hayes

Emily Hayes

Emily Hayes joined Ziliak Law in September of 2016 as a law clerk working with the Startups, Business and Corporate and Financial Industry Groups. She is in her third year of law school at Loyola University Chicago where she is a senior editor of the International Law Review. Read more...
Emily Hayes