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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 kikito (971480) on Friday October 15, 2010 @02:11AM (#33905286) Homepage

    “They had an idea of how the computer would change the prices but that does not make them responsible for what the computer did.”

    vs

    “They had an idea of how the gun would change the head of that person but that does not make them responsible for what the gun did.”

  • by Anonymous Coward on Friday October 15, 2010 @03:10AM (#33905528)

    I find it quite hilarious, that Timber Hill comes whining to the court, when they are well known for playing the very same game.

    I work in the european derivatives industry and traders at most big banks hate Timber Hill, because they have cost them a lot of money - by triggering the banks' automatic hedging systems though small orders for retail derivatives and raking in profits from the resulting trades on bigger derivative exchanges. What goes around, comes around...

  • by Anonymous Coward on Friday October 15, 2010 @03:15AM (#33905564)

    This is incorrect. A huge portion of trades done on some markets are from Algol trading. Every Algol, i've ever seen, usually tries to guess the strategy of other traders/Algols.
    Therefore nearly every Algol will by its nature '...manipulated that robot into giving them arbitrage'.
    On another note a lot of order books are anonymous or may be dark, but poor Algols should not rely on this since other algols are designed to sniff out patterns even in these situations.

  • Blame society (Score:1, Interesting)

    by Anonymous Coward on Friday October 15, 2010 @04:53AM (#33905904)

    It is really all the other day traders who should be fined for not having good enough trading bots.

  • by TheLink (130905) on Friday October 15, 2010 @06:40AM (#33906426) Journal

    Most stock traders aren't targeting one other stock trader with a series of transactions

    Yes, the high frequency traders target more than one stock trader, after all they can make more money that way:

    http://www.nytimes.com/2009/07/24/business/24trading.html [nytimes.com]

    http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html [nytimes.com]

    "High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits -- and then disappear before anyone even knows they were there. "

    "And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes -- software that a federal prosecutor said could "manipulate markets in unfair ways" -- it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage."

    In the recent US stock market crash fiasco, it seems that if their "fancy" computer programs screw up, the stock exchange rolls back the transactions. They don't do that for small investors.

    Now when small time investors (relatively anyway) beat some computer program at its game, they get convicted.

    Disgusting.

  • Re:Intriguing (Score:4, Interesting)

    by The Dodger (10689) on Friday October 15, 2010 @07:16AM (#33906616) Homepage

    > Can someone tell me why what they did was illegal? i.e. What are the limits?

    Put simply, they took the piss. Personally, I think they got off quite lightly because, if I recall correctly, the FSA's investigation revealed that they had planned to "drive up" the futures market which, to me, is almost a dictionary definition of market manipulation.

    It's like the difference between saying "I reckon the price of silver is going to go up, so I'm going to buy some silver so I can sell it later at a profit" and saying "Hey, let's buy up all the silver in the world so we can corner the market and make a killing!"

    Everyone with half a brain knew that what they had done was possible but our guys had rejected the idea without giving it any serious consideration because they knew it was deeply, deeply dodgy (in a bad way, that is) from a legal perspective.

  • by Paul Rose (771894) on Friday October 15, 2010 @07:48AM (#33906842)

    >>So these guys figured out how to second-guess somebody's trading algorithm. How in hell is that a crime?

    Not quite.

    If they had figured out how to predict where somebody else's algorithm was trading, and trade against it for profit, they would not be in trouble.

    What they did was figure out how somebody else's algorithm would react to stimulus, then entered created that stimulus, then traded against the result.

    They entered orders that had no intention of getting a trade (and indeed would have been unhappy to have traded because they were unnaturally high bids or low offers). These orders gave the impression to both people and software that the market had changed for real. The algorithm followed the "fake" data and made too high of a bid or too low of an offer. They then cancelled their "fake" orders and instantly entered real orders on the opposite side to hit the algorithm.

    This has been going in (sans computers) for decades, and is illegal in most regulated markets.

    It is similar to the idea of leaking fake news and trading against the move and then making a profit when people figured out it was fake.

  • by turbidostato (878842) on Friday October 15, 2010 @08:21AM (#33907106)

    "In fact they can ban you from their property because "you were winning" and be perfectly within the law."

    Which gets you straight into square one: "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".

    Casinos are not "just" private property, they are opened-to-the-public bussiness and, as such, subjected to specific normatives regarding access appart from, say, your own home, which basically come down to "you opened to the public for a specific service, you can't reject somebody because of exercising that service"... unless, of course, you happen to be a big trade/corporation with deep pockets, in which case you set your own rules.

  • Re:Intriguing (Score:3, Interesting)

    by LordNacho (1909280) on Friday October 15, 2010 @08:41AM (#33907288)

    I think the main argument is that Joe Investor benefits from having more liquidity. He can buy/sell a larger amount of shares than he would otherwise. Remember many people invest via huge pension funds, which have to shift pretty large amounts of shares.

  • by The Dodger (10689) on Friday October 15, 2010 @09:40AM (#33907978) Homepage

    Well, that actually makes more sense than TMB deciding to air their stupidity in public. :-)

  • by Paul Rose (771894) on Friday October 15, 2010 @10:21AM (#33908498)

    Almost.

    I can't speak for all of HFT, but for the most part they would be more than happy to get filled, but they don't get filled because they move too fast.

    They are calculating a theoretical price and placing orders that would theoretically be good to fill and that are very close to or at the "inside" (best bid or best offer). The inputs into their theoretical model change frequently and they cancel and replace their orders frequently, most often before they have a chance to get filled.

    The difference is that for the duration of the order (even if it is small) the HFT wants to get filled and isn't trying to necessarily push the price around. They know the likelyhood of a fill is small, but in a way they still "intend" to get filled and don't have the goal of manipulating the price.

    The guys who got in trouble put in orders that they hoped would not fill in order to cause another automated participant to follow along, and then quickly cancel their own order and hit the target order.

  • by Paul Rose (771894) on Friday October 15, 2010 @10:38AM (#33908706)

    I'll grant you your distinction between "fake" and "false".

    The orders (and news) were indeed "real".

    If the intent was not to move the price without seeking a fill, however, the securities law says that is wrong.

    Philosophically is it the right way? I don't know, but there is a legal basis for the prosecution.

  • Re:I know these guys (Score:3, Interesting)

    by gronofer (838299) on Sunday October 17, 2010 @12:57AM (#33922130)
    If that's the case, I'm surprised the Norwegians were prosecuted at all. Surely the complaint must have originated from Timber Hill itself, unless it involved Norwegian stocks that the regulators were monitoring. But why would Timber Hill initiate action over such a small sum of money (the article mentions £18,000 and £11,500)?

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