Commentary: No Joking Matter
There may be some cruel irony in the fact that the trial of Jitesh Thakkar commenced on April Fools Day but I’m pretty sure that he’s not laughing. Given the gravity of the charges brought against him and the sheer weight that the U.S. government is bringing to bear on him in a Federal courtroom in Chicago, he shouldn’t be. This is serious stuff.
Thakkar is being charged with spoofing of futures markets based upon software that his firm, Edge Financial, created for the notorious “flash crash trader”, Navinder Sarao. Sarao is a London-based futures trader who was arrested in April 2015 and charged with 22 counts, including one for wire fraud, ten for commodities fraud, 10 for commodities price manipulation and one for spoofing. Sarao plead guilty to two counts — wire fraud and spoofing — in November 2016, paying the government over $12 million and facing up to 30 years in prison. He was allowed to remain free, however, as he agreed to cooperate with prosecutors in exchange for a possible reduction in his sentence. His testimony against Thakkar is part of that deal.
To me, Sarao is a tragic figure. He was clearly a brilliant trader with gifts that very few people possess or understand. Video tapes were played during the first day of the trial that showed Sarao in action, taking naked short positions so large that every time the price changed by one tick he either made or lost over $37,000. The government seemed to imply that Sarao had an undue advantage based on the technology created for him by Edge Financial but what I saw was a bold and confident trader who was taking on the world from the basement of his parents home. He was seemingly picking up quarters in front of a steamroller — the market could have easily run him over and crushed him — and he did so for over 10 years, in the process racking up total gains of over $40 million. That’s no easy feat.
Unfortunately for Sarao, he did cross the line and manipulate markets, specifically the eMini S&P 500 futures contract at the CME, and that brought him to his current state. Sarao was diagnosed with Asperger Syndrome in 2015, a condition that may have contributed to both his success and his downfall. It may have also led him to his current state of destitution — he is on public assistance in his native England — as people he trusted seemingly stole every penny of his $50 million fortune, a story that was well told in detail by Bloomberg.
But Sarao isn’t the protagonist now, that role belongs to Thakkar. It was his firm that developed trading tools that Sarao allegedly used as part of his manipulative trading activities and the U.S. Justice Department is now prosecuting Thakkar as a co-conspirator in those schemes. Never mind that Sarao made millions while Thakkar received $24,200 for the software that he delivered, that none of the correspondence between Edge and Sarao ever mentions the words “manipulation” or “spoofing”, or that Sarao apparently told the FBI that the “back of book” functionality that Edge built for him could be used for both legitimate and illegitimate uses. The government is brazenly disregarding common sense and treading into very dangerous ground as they attempt to convict Thakkar for the crime of doing a good job.
…a toxic cocktail of intelligence, ignorance and arrogance…
I had mixed emotions as I sat through the first day of testimony in this trial. On the one hand, I have respect and sympathy for Sarao while, on the other, I was left with what borders on contempt for the government’s case. Theirs is a toxic cocktail of intelligence, ignorance and arrogance: the government has considerable intellectual firepower arrayed against Thakkar the small-business person but they possess a very limited understanding of how futures trading markets work and the dangerous belief that they are the smartest guys in the room. It is neither a fair fight nor is it one that the government should be waging. Let’s hope that justice prevails.
