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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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  • by AliasMarlowe (1042386) on Friday October 15, 2010 @01:15AM (#33905062) Journal
    So these guys figured out how to second-guess somebody's trading algorithm. How in hell is that a crime?

    Many mechanical trading algorithms are also trying to second-guess the actions of other market participants in order to make a profit. These guys just did the same, apparently in cases where the trades made by a particular mechanical algorithm would be big enough to move the market themselves.

    Mechanical trading algorithms are either fair game, or preferably, should be illegal. If mechanical trading algorithms are legal, then what these men did should definitely not be illegal.
  • by Omnifarious (11933) * <eric-slash.omnifarious@org> on Friday October 15, 2010 @01:15AM (#33905064) Homepage Journal

    All stock trading changes the market. Does the system they beat have algorithms for anticipating the results of its own trades on the market? If so, why aren't the owners of the system being brought up on charges for manipulating the market?

    No, the reason these guys were brought up on charges was because they aren't a big investment house, and beat a big investment house at its own game, not because they did something that's different from what any stock trader does.

  • by hkmwbz (531650) on Friday October 15, 2010 @01:18AM (#33905074) Journal
    I read about this case a while ago. It seems amazing that the people who are actively manipulating the market with thousands of automatic trades every minute are being protected, while the little guy who figured out how to win over the machines gets convicted. The idiocy of allowing robot traders to roam free should be very obvious after it caused the market to take a steep dive for no reason. But no, robot trading is being encouraged! Money talks.
  • by khchung (462899) on Friday October 15, 2010 @01:22AM (#33905088) Journal

    I didn't RTFA (of course), but how is what they did different from guess what real people would respond to certain trade and engineer to profit from that? Isn't that what every speculator is trying to do? If someone used a program to trade and other people guessed (without foul play) how the program responds and profited from it, why is that a crime?

    As for "manipulating prices", well, every investment firm is manipulating prices when they release analyst reports recommending "buy" or "sell" for stocks they own, I would like to see them prosecuted too!

  • by Y0tsuya (659802) on Friday October 15, 2010 @01:30AM (#33905116)
    The stock market is a casino. The banks and hedge funds is "House". As far as the government is concerned it's OK for banks and hedge funds to manipulate, but not for the little guys. If you screw with the house they wipe the floor with you.
  • I know these guys (Score:5, Insightful)

    by ebonum (830686) on Friday October 15, 2010 @01:32AM (#33905122)

    I know the guys at Timber Hill from before IB bought them. They are what one would calls pros. It is hard to think of them as victims. They have all the money hardware and brains a company could want. Actually, I would call Timber Hill fairly predatory. These guys were printing big money through high speed algo trading before anyone knew what that was back in 2000.

    Knowing them, I doubt they are happy that their name is in the news. Years ago, they truly didn't want any attention. The less the outside world knew, the better.

    The big issue is: this is essentially what all the high speed traders are doing. The line here is fuzzy. However, I fear these Norwegian fellows are being held to a higher standard than people who are more powerful and more established.

  • by phantomfive (622387) on Friday October 15, 2010 @01:40AM (#33905154) Journal
    That is exactly what I came here to say. I can be grudgingly convinced to accept auto-trading, after all it only takes a small portion from me since I make longer term trades, but when they convict people for this.......my support is gone. Where do I sign the petition to get rid of high speed trading? This is garbage.
  • by Kjella (173770) on Friday October 15, 2010 @01:49AM (#33905190) Homepage

    Most stock traders aren't targeting one other stock trader with a series of transactions, they manipulated that robot into giving them arbitrage. However, I thought their defense was quite strong in that a trade is a fact and can never be untrue as such. Poorly interpreting that trade makes you a bad investor. Repeatedly interpreting trades poorly makes you a bad investor with no learning ability. If that was illegal, there'd be lawsuits flying all over the stock market.

  • by Anonymous Coward on Friday October 15, 2010 @01:53AM (#33905216)

    Does anyone have a link to a human translated version of the Norwegian court doccument so we can get a more impartial view of the facts of this case? On the one hand we have a sensationalist news article without many facts and a blogget response with no facts and all rhetoric that claims to not be political yet says that they would be considered a liberal for making such an observation in the same sentance. I for one would like to see the facts of the case without all the opinions getting in the way from the outset.

  • by umghhh (965931) on Friday October 15, 2010 @01:55AM (#33905232)
    Profits are for big guys. If you manage to beat them at their own game you must be prepared to spend significant amount of your own proceedings on legal fees. It is still better that legal system in China - you bribe the wrong guy and you get portion of led into your head.
  • by tlambert (566799) on Friday October 15, 2010 @02:18AM (#33905310)

    But here's the thing, their behavior wasn't honest or genuinely based on real belief in the value of the stocks.

    So... the traders didn't act genuinely based a real belief in the stocks. Unlike the computers that ran the automated trading at the firm, which obviously act geuinely on their real belief in the stocks they are trading, because, well, everyone knows computers are always scrupulously honest.

    -- Terry

  • by Improv (2467) <pgunn@dachte.org> on Friday October 15, 2010 @02:18AM (#33905316) Homepage Journal

    All of this is a symptom of how far the stock market has branched from its purposes - it's not just a way people have involved distributed judgement of the worthiness of societal ventures anymore, now we have huge parasites in the system, feeding on each other. When the boot comes down, I don't think we should cry. Only a few of these people make an honest living that benefits society.

  • by Anonymous Coward on Friday October 15, 2010 @02:51AM (#33905428)

    Multiple layers of security. If you outwit the millions of dollars in research we spent then we get you thrown out of the game with a lawsuit.

  • by awjr (1248008) on Friday October 15, 2010 @02:52AM (#33905436)

    Although you are probably not aware of it, most trading arms of the banks are at war against each other, trying to determine the trading algorythms each of them use, and deploy trading engines that take advantage of any weaknesses. It's one of the reasons you see an immense amount of mathmatical talent recruited by the Banks.

    The problem I find with this, is that, unless the t&cs they signed to indicated that they should report any flaws in the bank's trading system, then this is actually a failure on the bank's part to test their systems.

  • by julesh (229690) on Friday October 15, 2010 @03:04AM (#33905510)

    But here's the thing, their behavior wasn't honest or genuinely based on real belief in the value of the stocks.

    No day trader makes decisions based on real beliefs of the value of stocks. That just isn't how day trading works. Day trading is essentially taking advantage of patterns that form in price changes because of the ways that people decide to buy and sell stocks. Read any advanced how-to-day-trade text and you'll see most of it is about psychology, because understanding what other investers are doing allows you to predict how their actions will affect the price of stocks. The entire point is to guess what purchases and sales other traders will make and to make money from the price movement those will create. Which is exactly what this pair did, the only difference being that it was a single automated trader rather than an entire market they were second-guessing.

  • by Hognoxious (631665) on Friday October 15, 2010 @03:05AM (#33905518) Homepage Journal

    Exactly. They're all second guessing each other, and that's OK.

    What these guys did was to third-guess them. Apparently that's cheating.

  • Victim vs culprit (Score:3, Insightful)

    by Errol backfiring (1280012) on Friday October 15, 2010 @03:17AM (#33905576) Journal
    In this case, it is the victim who figured out what the gun did with his attacker's head.
  • by shitzu (931108) on Friday October 15, 2010 @03:17AM (#33905578)

    It is like card counting. All you do is take play a game according to THEIR rules and be just a bit better at it than an average joe. Use of your memory in a card game is something that the casinos do not like and therefore it is banned.

  • by EJB (9167) on Friday October 15, 2010 @03:19AM (#33905592) Homepage

    I'm sorry to say, but this comparison is nonsense.

    A stock trader is a free actor. It has choices that it can make. For one, the choice to employ an automated system without human supervision, And even the automated system could respond in any way it liked, and was not obliged to respond in the way that these two stock traders envisioned.

    A head being subjected to an entering bullet has no choice. It can only follow the laws of physics.
    In that case, it is not the head that is responsible for what happens to it, but the last person or entity who had a choice in which action to take.

  • by Tom (822) on Friday October 15, 2010 @03:23AM (#33905602) Homepage Journal

    All of this is a symptom of how far the stock market has branched from its purposes - it's not just a way people have involved distributed judgement of the worthiness of societal ventures anymore,

    It hasn't been that for at least 50 years. Speculation has been the dominant market force for a very, very long time. It just never made as much headlines until recently.

    now we have huge parasites in the system, feeding on each other.

    We've had that since the first investment companies came into existence. It took what, three weeks at best?, until someone realized that investing in the future of a company is slow and risky, while cashing in on the expectations of those who are still dumb enough to do that is faster and safer - there are few things as certain as the stupidity of a large group of people.

  • by Magada (741361) on Friday October 15, 2010 @03:35AM (#33905652) Journal

    Bullshit. They did no wrong. The whole stock market thing is based on outwitting other investors. If you choose to let George Soros manage your money, I am free to try and outwit him, taking some of that money if I succeed. How is it different if you let a computer manage your money?

  • by ultranova (717540) on Friday October 15, 2010 @04:18AM (#33905804)

    It seems amazing that the people who are actively manipulating the market with thousands of automatic trades every minute are being protected, while the little guy who figured out how to win over the machines gets convicted.

    Not really. It's just nobility closing their ranks and watching each other's backs, least a peon would become their equal.

    You didn't really think that the law was same to all, now did you?

  • by js_sebastian (946118) on Friday October 15, 2010 @05:11AM (#33905984)

    But here's the thing, their behavior wasn't honest or genuinely based on real belief in the value of the stocks.

    Do you really think that savvy investors putting money into stock markets or housing markets or CDS or whatever during a bubble really think that the "fundamentals" justify such prices? No. They just think that the stocks will rise *a bit longer* so they better buy now and wait a little longer before jumping off the bubble. People who jump off the bubble too early lose their wall street job. There are even "momentum funds" that simply buy stocks as soon as the price starts rising, and sell shortly after, based on the idea that when a price starts moving up it keeps going up for a little while (and by the way, the fact that these funds make money disproves the random walk model and hence the rational expectations hypothesis). Honestly, any kind of fast trading clearly has little or nothing to do with the *real* value of stocks.

    Not to mention algorithm trading... try asking a neural network if it *really really honestly* believes that a certain stock is worth more than its current value.

  • by samjam (256347) on Friday October 15, 2010 @05:25AM (#33906026) Homepage Journal

    Which, of course, the machine can't have.

    Software which discovers the relationship all on it's own can't be malicious in using it and the humans may not even know what "complex" strategy the machine is following..

  • by Hognoxious (631665) on Friday October 15, 2010 @06:11AM (#33906274) Homepage Journal

    they manipulated that robot into giving them arbitrage

    It's not as if they hacked into it and caused it to give them favourable trades. If the thing behaves in a predictable way such that it can be gamed then it's tough titty for the idiot who runs it. What's wrong with exploiting that? You'd do it in a card game and you'd do it in a war.

    it's no different to knowing that trader X is Jewish and might be more likely to buy because it's Yom Kippur or whatever.

  • Re:Lunatic blogger (Score:3, Insightful)

    by BotnetZombie (1174935) on Friday October 15, 2010 @06:12AM (#33906284)
    How about 99% of the posts here?
    Those are reactions from around the world (though admittedly from seeming lunatics like myself).
  • Re:Intriguing (Score:4, Insightful)

    by Prof.Phreak (584152) on Friday October 15, 2010 @07:48AM (#33906830) Homepage

    Here's an industry related question, how does high frequency trading benefit the general public? The push towards regnms, the push towards faster and faster executions---how does all this benefit Joe Investor? What is SEC thinking?

    I doubt Joe Investor cares if his trade executes within a microsecond or in a few minutes. I even doubt he cares that much about the 1% price difference he may enjoy (or regret) from his investment within a week.

    So why is everyone in the industry assuming Joe Investor is a day-trader with an algorithm at his desk? Even the active investors I've met keep stocks for sometime---the only "day-traders" I've met aren't in the investment business---they're there to benefit from minute-by-minute price fluctuation---leaching (by tiny amounts) the profits of long term participants.

    I guess what I'm saying is, if high frequency trading is a billion dollar industry---those billions of dollars, in small amounts, were directly taken out of pockets of long-term investors---they're the inefficiency in the market.

  • Re:Clarification (Score:3, Insightful)

    by Magada (741361) on Friday October 15, 2010 @09:21AM (#33907762) Journal

    Sorry, what? They manipulated the market by buying and selling stock? How could they be convicted for trading? How can a buy or a sale constitute a "misleading signal"? Misleading whom? In relation to what fundamental truth?

  • Re:Intriguing (Score:3, Insightful)

    by m50d (797211) on Friday October 15, 2010 @11:02AM (#33908966) Homepage Journal
    Here's an industry related question, how does high frequency trading benefit the general public? The push towards regnms, the push towards faster and faster executions---how does all this benefit Joe Investor?

    The prominence of HFT does two things. Firstly, it makes the market liquid and more efficient - the difference between the prices at which Joe Investor can buy or sell a stock is probably down to fractions of a penny. Which you don't notice on the individual scale, but it improves the functioning of the whole market.

    Secondly, and this is the more controversial factor, it can make the market more sensitive. See the recent article about the chicago futures whatchumacallit - note that it started due to an actual owner of whatever the commodity was (lumber? I forget) wanting to offload $4B worth. The HFT algorithms got wind of it, the price dived down a ways, the seller lost a substantial amount of money, then the market realised it was essentially a fuss about nothing and the price recovered.

    Now, you could say that the HFT guys turned the molehill into a mountain. But personally I'd prefer to hear about it when someone tries to sell $4B of what I was just about to buy on the cheap. Thanks to the HFT folks, now the market as a whole twitches, where previously it would be only the big, well-informed investment trusts who heard about it. Up to you whether you think that's better or worse.

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