Flash Crash: The Day Apple Soared To $100,000
A bedroom trader in Hounslow. $1 trillion wiped in five minutes. Nav Sarao and the Flash Crash.
May 6th, 2010
The clock strikes 6am and the alarm starts ringing. Navinder Singh Sarao gets out of bed, ready for another day of work. He stumbles, half asleep, to his desk at the corner of his childhood bedroom located within his parents’ home in Hounslow, West London. A wiggle of the mouse and six screens light up. Nav scrolls through overnight news, followed by any market movements. The topic taking everyone’s attention at the moment is the possible default on Greek sovereign debt, and any subsequent bailout. Markets are opening weak, with sovereign spreads wider, premiums on Credit Default Swaps higher, and European stocks 4% lower.
This is exactly the kind of day Nav operates best in, one of fear and volatility. At 11:17am he starts placing large limit sell orders on S&P futures — 200, 400, 900-lots — outsizing nearly everything else in the market. In Hounslow, sprinklers go off to water the garden on a peaceful sunny day. Meanwhile in Athens, there are riots outside parliament.
As the day progresses, the order book becomes increasingly imbalanced. Market liquidity is drying up and buyers are stepping back. The sell orders which Nav has been placing account for nearly a third of all visible selling pressure on the exchange. At 2:30pm, the Dow is down over 300 points. The VIX has surged more than 20% since the open. Liquidity in S&P futures has been cut almost in half. In Overland Park, Kansas, a mutual fund company called Waddell & Reed is about to execute a trade.
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Four years earlier, Nav had been making money for someone else. Fresh out of Brunel University he joined Futex, a proprietary firm on the outskirts of London. While other trainees were still losing money in a simulated environment, Nav was making tens of thousands of pounds on live markets.
As time went on, Nav grew increasingly dissatisfied with having to share his profits with his employer. So, in early 2008, at 28 years old and with a net worth of £2 million, he handed in his notice and left. He decided to set up a trading station in his childhood bedroom of his parents’ house. His strategy was simple but executed ferociously. He would place large sell limit orders on S&P futures, always a few ticks above the market. Other traders would see the selling pressure and prices would drift lower. Meanwhile, Nav would buy and then cancel the sell orders. He repeated this practice, known as spoofing, thousands of times a day. By 2010, he had created an algorithm to automate this.
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It’s now 2.32pm, and one of Waddell & Reed’s fund managers decides it’s time to hedge the $75 billion portfolio – mostly invested US equities – and enters a sell order of 75,000 S&P futures worth roughly $4.1 billion. In a market already thin and heavily skewed to the sell side, there are no buyers for such a size. When Waddell & Reed’s algorithm starts selling, the high frequency market maker who has been hit offloads the position on to someone else, who then passes it on to someone else. The same contracts are passed around between firms at rapidly falling prices as nobody wants to hold the risk. Doing so generates large volumes, and because Waddell & Reed’s algorithm is programmed to sell 9% of whatever volume has traded in the previous minute, it creates a snowball effect of selling.
At 2:42pm the market goes into freefall. The Dow drops 600 points in five minutes. $1 trillion in market value gets wiped out. Accenture’s stock goes from $40 to $30, then $20, then…1 cent. Apple shares, on the other hand, soar to $100,000. Prices stop making sense, the market breaks down, and it becomes absolute chaos. At around 2:45pm the Chicago Mercantile Exchange (CME) triggers a five second trading pause on S&P futures. When trading resumes, buyers return and prices stabilise.
By 3pm the market recovered most of the loss and the Dow closed down 348 points on the day. The Flash Crash was over, but it would take years for anyone to fully understand what had just happened. The early theory was a fat finger — a trader somewhere who had typed billions instead of millions, subsequently sending the market into a tailspin. Attention turned to high frequency trading firms, whose algorithms had clearly played a role in the freefall, though whether as a cause or a consequence remained up for debate.
Five months later, a joint report by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) pointed the finger at Waddell & Reed. The CME pushed back — a trade of that size, they argued, was entirely routine and could not have caused what happened on its own. Many in the market agreed. Nobody, at that moment, was looking at Hounslow.
While the finger-pointing continued, regulators moved quickly. Within months of the crash, US exchanges introduced circuit breakers on individual stocks — automatic pauses triggered if a price moved too far, too fast. Spoofing was criminalised in July 2010, just two months after the crash. In the past, the practice had existed in a legal grey, with regulators largely powerless to act.
Despite spoofing being now a crime, the authorities lacked the tools to detect it. Nav, who had made $880k on the day of the Flash Crash, carried on spoofing the E-mini as if nothing had happened. He accumulated a fortune that would eventually reach $70 million, but most of it was lost by handing it to fraudsters. It was only in 2014, when the CFTC developed surveillance tools sophisticated enough to identify market manipulation patterns, that analysts traced the activity back to him. Nav was arrested in April 2015 for fraud and market manipulation and a year later pleaded guilty to wire fraud and spoofing. In 2020, Judge Kendall sentenced him to a year of home confinement.
Markets had crashed many times before, but May 6th, 2010 exposed the world to a new kind of danger, one where automated systems interacting in a fragile and illiquid market could spiral out of control. The regulatory responses that followed were meaningful but incomplete, and markets have remained vulnerable to crashes of the same nature: the US Treasury flash crash in October 2014, the ETF flash crash in August 2015 and the Sterling flash crash in October 2016.
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