He took on Wall Street from his parent’s bedroom and won, for a while…
In the high-stakes world of financial trading, where Wall Street giants and sophisticated algorithms dominate, the story of Navinder Sarao, a day trader who made millions from his parent’s bedroom in Hounslow, London, is not just remarkable but almost mythical. The two worlds of billion-dollar trades and living in your parent’s house seem miles apart but “Nav” as he was known managed to straddle them beautifully. At least for a while…
Early Life and Background
Navinder Sarao’s story begins with his family’s journey from Punjab, India, to London, UK. Seeking better opportunities, they settled in Hounslow in 1982, a location chosen for its affordability due to its proximity to the airport. Sarao’s parents worked tirelessly in multiple jobs, a testament to their dedication to providing a better future for their children. This background laid the foundation for Sarao’s later achievements and his relentless drive. He wanted to give back to his parents and make them proud.
University Years and Introduction to Trading
Nav’s first taste of the world of trading began during his college years. While studying computer science and maths, he was intrigued by a roommate who successfully traded tech stocks using his student loan. A risky thing to do since students in the UK would have little money left for food if one trade went badly. However, this encounter sparked Sarao’s interest in the stock market, leading him to immerse himself in learning everything about trading. His obsession with the video game FIFA, where he ranked in the top 200 players worldwide, demonstrated his ability to deeply focus and strategize, skills that would later be pivotal in his trading career. He also learned how to analyse people and look for behavioural patterns — this would be the most crucial skill set that would go on to have huge consequences.
Despite initial losses, Sarao’s early trading experiences were crucial in building his understanding of the markets. His big break came when he responded to an advertisement seeking futures traders. This led him to a position at Futex, a company far from the glamour of Wall Street. It was here that Sarao began to refine his trading strategies, applying his analytical skills and pattern recognition abilities honed through years of gaming. He noticed certain people would place trades at the same time each day, once they realized why it is easier to “front-run” (place a trade before they do) and make a small profit each time. With enough leverage, this could be extremely profitable.
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Developing a Unique Trading Strategy
Sarao’s approach to trading was unconventional. He applied his gaming strategy of observing patterns and developing counter-strategies to the financial markets. This method allowed him to identify opportunities that others missed and to execute trades with precision. His strategy was not just about making money; it was about understanding and exploiting the intricacies of the market, effectively becoming a “glitch in the matrix.” His strategy took on the smartest algorithmic high-frequency traders and beat them! He flipped it around. Knowing how the algorithms were set up, he knew which indicators would lead to big market movements. Nav hired someone to build bespoke software to allow him to essentially “fake” the market causing movements in stocks that he could then profit off. This is known as ‘spoofing’, and is clear market manipulation.
The Flash Crash
Sarao gained notoriety for his alleged role in the 2010 Flash Crash, a rapid and deep stock market crash that lasted no more than an hour. His use of an automated program to place and then cancel large orders, a tactic known as “spoofing,” was said to have contributed to the crash. This event brought Sarao into the spotlight for all the wrong reasons, highlighting the impact that a single trader could have on the global financial markets. It eventually led to him being thrown in jail, paying back all the money that he could get his hands on, and being momentarily extradited to the US.
What can we take away from such a remarkable story?
Navinder Sarao’s story about challenging the established norms of the financial world. His journey from a modest background to becoming a significant figure in the trading world is a testament to his skill, determination, and innovative approach to trading. Notwithstanding, what he did was “wrong”, the line between genius and illegal is so often contextual in the financial markets. Most cheat, Nav was just too naive to look after himself.
Sarao’s story challenges the perception that the financial markets are the exclusive domain of Wall Street elites and sophisticated algorithms. Outsiders can have their moment in the sun. But when you beat the casino at their own game, you pay the ultimate price.
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