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Crime Software The Almighty Buck The Courts

Norwegian Day Traders Convicted For Manipulating Computer Trading System 299

Posted by timothy
from the shades-of-eudaemonia dept.
An anonymous reader submits news of the conviction of two Norwegian day traders, Svend Egil Larsen and Peder Veiby, who were on Wednesday fined and given suspended sentences (Norwegian court, Norwegian document) for cleverly working out — and cashing in on — the way the computerized trading system of Interactive Brokers subsidiary Timber Hill would respond to certain trades. They used the system's predictable responses to manipulate the value of low-priced stocks. The pair have gotten some sympathetic reactions from around the world, and promise to appeal.
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Norwegian Day Traders Convicted For Manipulating Computer Trading System

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  • Grammar Nazi time! (Score:0, Informative)

    by Anonymous Coward on Friday October 15, 2010 @01:02AM (#33905012)

    They were convicted of manipulating the computer system. They were convicted for getting caught (and not hiring a better lawyer).

  • Lunatic blogger (Score:2, Informative)

    by DerekLyons (302214) <fairwater&gmail,com> on Friday October 15, 2010 @01:16AM (#33905068) Homepage

    "The pair have gotten some sympathetic reactions from around the world, and promise to appeal."

    A single blog entry from a seeming lunatic does not 'reactions from around the world' make.

  • by Anonymous Coward on Friday October 15, 2010 @02:00AM (#33905262)

    Norwegians convicted for outwitting trading system

    By Andrew Ward in Stockholm

    Published: October 13 2010 19:17 | Last updated: October 13 2010 19:17

    Two Norwegian day traders have been handed suspended prison sentences for market manipulation after outwitting the automated trading system of a big US broker.

    The two men worked out how the computerised system would react to certain trading patterns - allowing them to influence the price of low-volume stocks.

    The case, involving Timber Hill, a unit of US-based Interactive Brokers, comes amid growing scrutiny of automated trading systems after the so-called "flash crash" in May, when a single algorithm triggered a plunge in US stocks.

    Svend Egil Larsen and Peder Veiby had won admiration from many Norwegians ahead of the court case for their apparent victory for man over machine.

    Prosecutors said Mr Larsen and Mr Veiby "gave false and misleading signals about supply, demand and prices" by manipulating several Norwegian stocks through Timber Hill's online trading platform.

    Anders Brosveet, lawyer for Mr Veiby, acknowledged that his client had learnt how Timber Hill's trading algorithm would behave in response to certain trades but denied this amounted to market manipulation. "They had an idea of how the computer would change the prices but that does not make them responsible for what the computer did," he told the Financial Times. Both men have vowed to appeal against their convictions.

    Messages posted on Norwegian internet forums on Wednesday indicated widespread sympathy for the defendants. "It is the trading robots that should be brought to justice when it is them that cause so much wild volatility in the markets," said one post.

    Mr Veiby, who made the most trades, was sentenced to 120 days in prison, suspended for two years, and fined NKr165,000 ($28,500). Mr Larsen received a 90-day suspended sentence and a fine of NKr105,000.

    The fines were about equal to the profits made by each man from the illegal trades.

    Christian Stenberg, the Norwegian police attorney responsible for the case, said any admiration for the men was misplaced. "This is a new kind of manipulation but it is still at the expense of other investors in the market," he said.

    Interactive Brokers declined to comment.

    Irregular trading patterns were first spotted by the Oslo stock exchange and referred to Norway's financial regulator.

  • by Anonymous Coward on Friday October 15, 2010 @02:08AM (#33905280)

    A tale of man versus algo in Norway

    By Andrew Ward in Stockholm and Jeremy Grant in London

    Published: October 14 2010 22:27 | Last updated: October 14 2010 22:27

    A court in Oslo has ruled it was market manipulation. For others, though, it is a tale of how two day traders outwitted the rapid-fire machines that have come to dominate financial markets.

    Peder Veiby was trying to earn some money in the stock market to support his studies at the Norwegian School of Management when he was hit by a criminal charge for alleged market manipulation. Now he has found himself at the centre of a landmark legal case involving computer algorithms, or programmes, at the heart of automated trading systems.

    Mr Veiby and another Norwegian day trader were handed suspended prison sentences and heavy fines on Wednesday after the court found them guilty of exploiting flaws in the electronic trading platform of a US broker to send "false and misleading signals" to the market.

    The two men each worked out how to make money by predicting how the computer algorithm of Timber Hill, a unit of US-based Interactive Brokers, would respond to certain trades. They denied that this amounted to market manipulation but the court disagreed.

    The case comes amid growing scrutiny of automated trading systems after the so-called "flash crash" in May, when a single algorithm triggered a plunge in US stocks.

    Algorithms are computer programmes that have emerged in recent years as trading has become fragmented across many different types of trading venues.

    The trading landscape has been transformed beyond recognition in the US, where as little as a decade ago, most stock trading was executed manually, either on the floor of the New York Stock Exchange or on traders' desks.

    The algorithms, "algos" in market jargon, are used by brokers and asset managers to help navigate this complex trading landscape. They are also used by firms using their own money to trade to submit thousands of orders in the blink of an eye. One type of algorithm, known as "efficiency" or "scheduling" algos, takes a large order, splits it into smaller pieces and sends it out to find a match periodically, finding the best possible price at the time.

    Anders Brosveet, lawyer for Mr Veiby, says his client noticed a pattern in how the algorithm behaved while he monitored a long-term investment he had in a lightly traded Norwegian stock.

    Mr Veiby found that the bid and ask prices moved up and down in tandem after each trade, making it easy to predict the spread between them.

    He also noticed that the algorithm would respond in the same way to a small trade as it did to a larger one. This allowed him to buy a large number of shares at a low price and then make several smaller trades to bid up the price before selling out at a profit.

    Svend Egil Larsen, the other defendant and a full-time day-trader for the past seven years, made the same discovery separately.

    The two men did not know each other and it emerged in court that they had sometimes inadvertently undermined each other's strategies as they each made similar trades in low-volume Norwegian stocks whose prices could be moved easily.

    "I did not set out to trick the robot," Mr Larsen told Norway's Dagens Naeringsliv newspaper. "But after acting against it a few times, you see how it behaves. The computer was fairly obvious."

    The reaction among Norway's amateur trading community has been largely sympathetic towards the men, even though prosecutors claimed they made tens of thousands of dollars in profits at the expense of other investors. "How can we be able to make money if we are not smarter than the robots?" asked one commentator on an online forum.

    That the two men made their discoveries separately has raised questions over whether other traders around the world could be doing the same. "Anyone who is observant and trading in a stock with low liquidity and a stupid computer [algorithm] can do this," said Mr Brosveet.

    Algorithm experts

  • by Nursie (632944) on Friday October 15, 2010 @02:18AM (#33905312)

    The computer is an actor, empowered by the trading house to make trades for them. It is an agent of a conscious entity.

    Your analogy falls apart there, because a gun is a passive item.

    This is more like poking a beehive with a stick and collecting the small amounts of honey that drip out. And then the bees got pissed.

  • Intriguing (Score:5, Informative)

    by The Dodger (10689) on Friday October 15, 2010 @04:44AM (#33905876) Homepage
    I'm not a lawyer and I don't speak Norwegian so I can't read the court document to find out exactly what happened. I am, however, an electronic trading specialist and I've also been a trader at a big American investment bank (one that didn't go bust, by the way, despite my best efforts).

    Rumour has it that these guys realised that there was a flawed algorithm (which turns out to have been operated by Timber Hill) making a market in illiquid shares, which set its quotes based either on the prices at which recent trades in those shares had been done, or on the algorithm's own position in the stock.

    To give some background: if you are making a market in a stock, that means you are prepared to buy from people who want to sell and sell to people who want to buy. Unless you're feeling particularly generous, you want to buy at a "low" price and sell at a "high" price. In liquid markets (i.e. where there are lots of people buying and selling), you can typically rely on the market mid price (i.e. the best bid plus the best offer, divided by two) and "spread" off that (e.g. add a cent to it to get your ask, subtract a cent from it to get your bid). As the market (i.e. the mid price) moves up and down, you can adjust your bid/ask to follow it and, if you end up buying or selling stock, you can adjust your bid/ask to make it more likely that your quotes get hit/lifted to flatten out your position (e.g. if someone hit your bid and sold you shares, you would probably lower both your bid and your offer, in relation to the market, to make it more likely that someone will buy the shares off you and less likely that you'll buy more shares).

    However, in illiquid markets and, in particular, in markets where you are the only market-maker, you may not be able to rely on a market mid, because you are the market, so it's up to you to set the price.

    So, let's say you start off with a quote of 99.99/100.01 and a quantity of 10,000 on each side. I come in and lift your ask (i.e. I submit an order to buy at 100.01, which matches against your ask) to the tune of 1,000 shares (i.e. I buy 1,000 shares from you). You are now "short" 1,000 shares, so you might adjust your price to make your bid more attractive to potential sellers - i.e. you change your quote to 100.00/100.02 - and you keep quoting with a 10,000 quantity on either side.

    I buy another 1000 shares from you. You shift your quote to 100.01/100.03

    I buy another 1000 shares from you. You shift your quote to 100.02/100.04

    I buy another 1000 shares from you. You shift your quote to 100.03/100.05

    I now own a total of 4000 shares, for which I paid a total of [(1000*100.01)+(1000*100.02)+(1000*100.03)+(1000*100.04)=] 400,100

    I now hit your bid and sell you back all 4000 shares at 100.03 for a total of 400,120

    I just made myself $20. Thanks very much. Rinse, lather, repeat.

    Now, you can see how some people might claim that I'm manipulating the market because I'm issuing orders into the market with the intent/expecation that the price will move as a result. But it's all a bit of a grey area.

    However, I might argue that I'm merely taking advantage of bids and offers that are already in the market. If the market-maker on the other side wants to quote prices that allow me to make a profit (or, more accurately, if he's been stupid enough to roll out a market-making algorithm that does that), then why shouldn't I take advantage of it?

    If this is what happened, then I'm surprised that Timber Hill decided to make an issue of it. If I'd been that stupid, I probably wouldn't want to draw everyone's attention to it. I would put the loss (which is this case appears to have been kless than $70k) down to experience, fix my algorithm and move on.

    People/banks/brokerages/traders/hedge funds do make mistakes like this. A long, long time ago, when I was younger and far more stupid than I am now, I once gave a trader a market-making algorithm that used the market

  • by EdgeyEdgey (1172665) on Friday October 15, 2010 @04:47AM (#33905892)
    Liquidity is not provided because the HFT bid/offers get withdrawn.

    A HFT is like a shop assistant getting a (tiny) cut of each transaction they process. They sit in between buyers and sellers collecting pennies, like market makers but without having to guarantee a market.
  • by TFAFalcon (1839122) on Friday October 15, 2010 @05:04AM (#33905960)

    I don't think it's actually banned, they just ask you to leave if they find out you can do it successfully. They encourage people to try it, as people trying and failing means more cash for the casino.

  • Legal here! (Score:1, Informative)

    by Anonymous Coward on Friday October 15, 2010 @05:54AM (#33906162)

    Ukrainian stock trader here: It's LEGAL in Ukraine!
    Except there's almost no profit from trading stocks in here, also we have to cope with huge taxes.

  • Re:Intriguing (Score:2, Informative)

    by lucifron (964735) on Friday October 15, 2010 @06:05AM (#33906238)

    AFAIK this was a criminal case, and Timber Hill aren't involved beyond acting as a naive market maker.

  • by Anonymous Coward on Friday October 15, 2010 @07:01AM (#33906522)

    Bullshit, I've seen the prices move by more than 15% either way with absolutely no cause or warning. Download TD Amerittrade's QuoteTracker [quotetracker.com] if you want to see for yourself.

  • Clarification (Score:2, Informative)

    by Informationman (1355865) on Friday October 15, 2010 @07:05AM (#33906548)
    I am Norwegian, soon-to-be a lawyer and a computer scientist ( with some experience with day trading, eps. in the norwegian market )

    As many of you have pointed out, and wanted to know: What are these young men charged with and convicted of ? Is it winning over an algo? Outwitting another "player in the market" ? Winning over the "big guys" ?

    Of course not. It is not illegal to be smart, nor to make money in the stock market by "outwitting" someone - or something.

    In the Norwegian court document refereed to, the parties admits that the trading algo used in this case was of "first generation" and was not particularly advanced. It did not learn, and was easily manipulated.

    The law of which their were convicted says ( loosely translated ) something like this : [it is illeagal to] "by illegally execute market manipulation with financial instruments, by submitting orders in the market or execute transactions which gives, or is capable of giving, false or misleading signals about the supply(offer), demand or price on financial instruments".

    They are charged with, not manipulating the alog itself, but the whole market _through their transactions_ with the algo. They _knew_ what was going to happen by doing what they did - the prices would rise on buy and the opposite on sell. They (maliciously) exploited this, but at the same time, manipulated the price in the market as a whole, which is illegal by Norwegian law. ( I and would guess, in the majority, if not all, jurisdictions)

    This conviction was also given by the District(lower) Court in Norway. The Appellate Court and most likely also the Supreme Court of Norway will have their saying before this case is over.
  • Re:Intriguing (Score:1, Informative)

    by Anonymous Coward on Friday October 15, 2010 @07:42AM (#33906780)

    The most common reason is because they have a very good idea of the ideal price of a stock. If you know for a fact that a share should cost precisely $42.30, you would be willing to buy any amount at $42.29 and at the same time sell any amount at $42.31. Either transaction would net you $0.01

    GP is talking about another case, the market maker. A market maker is a party that's paid to create liquidity. They're contractually obliged to quote both buy and sell prices. The effect is that small shareholders can always sell their stock, and potential shareholders can always buy small amounts, without the price shooting off towards zero or infinity. Such liquidity is appreciated by shareholders in general and listed companies, which is why market makers get paid.

  • by Anonymous Coward on Friday October 15, 2010 @07:47AM (#33906824)

    Machine learning. Computers may not program themselves, but we can easily program them to poke the world and respond according to a reward function. In fact, it's a big area of research.

  • by juletre (739996) on Friday October 15, 2010 @08:03AM (#33906958)
    As far as I have understood it (being a norwegian and following the case very loosely) , Timber Hill never filed suit. It was the Oslo Stock Exchange who discovered it and sent a report to the ( Financial Supervisory Authority of Norway [finanstilsynet.no] ) who read it and sent the report on to the Ministry of Finance. Said ministry sent it to The National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway [okokrim.no] who then sent it to the police asking for an indictment.

    The courts then found them guilty.
  • by xiando (770382) on Friday October 15, 2010 @08:25AM (#33907128) Homepage Journal

    If this is what happened, then I'm surprised that Timber Hill decided to make an issue of it. If I'd been that stupid, I probably wouldn't want to draw everyone's attention to it. I would put the loss (which is this case appears to have been kless than $70k) down to experience, fix my algorithm and move on.

    It must be noted that TMB did not react or care at all. It was Oslo Stock Exchange (OSE) who made an issue of this and made The National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway (ØKOKRIM) take it to court. Timber Hill has made no comment, refused to appear in court and generally appear to want this to quietly go away.

  • Re:Intriguing (Score:2, Informative)

    by AlienHeart (676363) on Friday October 15, 2010 @12:05PM (#33909822)
    According to the court documents, this is approximately what they did. The men discovered that immediately following their bid the asking price would increase, without exception. The so-called scam then occurred according to this scheme (example from court documents) Buy 1000 shares at NOK 205.50
    buy 500 shares at NOK 206.00
    buy 300 shares at NOK 206.50
    buy 200 shares at NOK 207.00
    buy 200 shares at NOK 207.50
    buy 200 shares at NOK 208.00
    buy 200 shares at NOK 208.50
    sell 1000 shares at NOK 207.50
    sell 500 shares at NOK 207.50
    sell 500 shares at NOK 207.00
    sell 500 shares at NOK 206.50
    sell 100 shares at NOK 206.50


    This all occurred within 90 seconds, and earned them NOK 1 835 (after fees), but with no stocks actually in their possession.

    This type of trading occurred many times over about 2 years time, and once their purchasing pattern event caused trading in some shares to be suspended.

    Also according to the court documents, the laws more or less leave the details of describing what counts as fraudulent up to the finance authorities ( by comparing their actions to what is deemed normal for the market, etc.).

    Thus, the court seems to me to be judging it the way the lawmakers intended.

    I do wish the courts would just laugh at their stupid algorithms though... I'd certainly have been very embarrassed if I wrote such bad code.

In seeking the unattainable, simplicity only gets in the way. -- Epigrams in Programming, ACM SIGPLAN Sept. 1982

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