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Craig Ruttle/Bloomberg Craig Ruttle/Bloomberg

It only took a spreadsheet souped up with custom enhancements to manipulate one of the world’s biggest markets with a strategy that on some days involved trading billions of dollars’ worth of stock-futures contracts.

According to the U.S. Justice Department, London trader Navinder Singh Sarao earned $40 million from 2010 to 2014. His product of choice: CME Group Inc.’s E-mini futures on the Standard & Poor’s 500 Index, the key measure of U.S. stock prices. He traded so much, the U.S. government says, that he contributed to the flash crash of May 6, 2010, that briefly drove shares into a nosedive that erased nearly $1 trillion in value.

Sarao, according to the complaint filed in a Chicago court Tuesday, used strategies known as spoofing and layering -- putting in fake orders to drive prices in a favorable direction -- to manipulate trading on CME’s Globex market, one of the most important in the world. He would pin his manipulative quotes just above or below current prices to trick other market participants into thinking futures were poised to move. Sarao allegedly posted those orders with no intention of executing them.

“With the aid of an automated trading program, Sarao was able to all but eliminate his risk of unintentionally executing these orders by modifying and ultimately canceling them before execution,” the Justice Department said in its complaint. “Meanwhile, he exploited his manipulation to reap large trading profits by executing other, real orders.”

Slightly Higher

Once the weight of his offers began pushing the price, he would trade futures to profit. If the plan was to drive the contracts lower, he’d sell futures contracts and buy them back at a slightly lower price. When he stopped his technique, which led to the price rising, he’d repeatedly buy contracts and sell them at slightly higher prices, according to the complaint.

Sarao’s alleged trading behavior was audacious. From a business based in the outskirts of London, on April 27, 2010, he executed almost 18,000 E-mini trades valued at roughly $11.3 billion and made about $821,000 in net profits, according to the U.S. government’s complaint.

On May 4, 2010, he executed nearly 16,000 trades valued at $7.6 billion, earning $877,000. The following day, it was nearly 20,000 trades valued at $8.7 billion and profits of $435,000.

Sarao’s activity on May 6 “was particularly intense in the hours leading up to the Flash Crash,” according to the complaint. At one stage, his offers to sell E-Mini contracts accounted for 29 percent of all the offers on CME’s book. Sarao’s trading profit from E-Minis that day was $879,000.

On one of the occasions that Sarao was contacted by CME about his activities, he turned the tables on the exchange, saying he “was just showing a friend of mine what occurs on the bid side of the market almost 24 hours a day, by the high frequency geeks,” according to the complaint. Sarao then asked CME if their questioning of his conduct meant that “the mass manipulation of the high frequency nerds is going to end.”