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Norwegian Day Traders Convicted For Manipulating Computer Trading System
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.
They were convicted of manipulating the computer system. They were convicted for getting caught (and not hiring a better lawyer).
I'm sympathetic, too, but that doesn't make market manipulation legal. The sentence seems appropriate to me. It basically consists of taking away the illegal profits and a "Don't do it again." Timber Hill should consult with them on improving the system.
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.
Those who can make you believe absurdities can make you commit atrocities. - Voltaire
"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.
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!
Oliver.
FTFA:In yesterday's conviction of the Norweigan traders, the prosecution said the pair had given "false and misleading signals about supply, demand and prices"
In the US the official body that does this is called the Working Group on Financial Markets.
They hate it when other people cut in on their action.
Set your phasers on "funky"!
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.
Sure these people are smart. Sure they did something clever in figuring out the way the computers work. Sure making money is the goal of all stock trading. Sure all trading changes the market
But here's the thing, their behavior wasn't honest or genuinely based on real belief in the value of the stocks.
It was based on their ability to mislead a computer, and no more commendable than somebody deceiving a human being.
They did wrong, and while you can fairly lament the automated trading systems, it's not a good idea to manipulate them to show how broken they are. It's a bad kind of manipulation, as opposed to the good kind which is accepted by all. I'm sure somebody will ask how to tell the difference, but I really don't feel competent to explain it. Just know that you don't want to break the rules. Even for show.
That, like breaking into your neighbor's home to show them they need to lock their windows will just get you into trouble.
If you must, conduct a demo using a simulation, but don't do it in the real world if you know what's good for you.
PS, Shadowrun had it before! And I'm sure some science fiction author thought of it too. I can almost credit H. Beam Piper's Cosmic Computer, but that was the computer deciding to fool itself so...maybe not.
"It startled him even more when just after he was awarded the Galactic Institute's Prize for Extreme Cleverness he got lynched by a rampaging mob of respectable physicists who had finally realized that the one thing they really couldn't stand was a smartass."
If the Algorithms anticipate the market are they not anticipating and manipulating the market too?
The emperor has no clothes.
In soviet Russia, YOU control market.
This is a hacked account, for which the owner can not be held responsible.
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.
“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.”
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
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.
For every problem, there is at least one solution that is simple, neat, and wrong.
Is there an English version of this report?
fist prostate
If I get this right, someone is convicted for cleverly working out how a system works that cleverly works out how other systems in the market work (which is what an Algo in principle is). If I pare this down to the essentials, it seems this person is convicted of focusing on one particular trader instead of the whole market.
That's going to be interesting from a legal perspective, because there's nothing illegal in what he has done as far as I can see, unless he had insider knowledge. It's a bit like learning the characters of manual traders to trade against them - just faster..
Break out the popcorn..
Insert
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.
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.
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
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...
In this case, it is the victim who figured out what the gun did with his attacker's head.
Nae king! Nae laird! Nae yurrupiean pressedent! We willna be fooled again!
This is the first step, next someone will be convicted for manipulating other people, because they find stocks they belive will increase in value due to other peoples trading activities, and next.... The whole redicules stock market will be taken down, and all the useless ignorants wasting their lives buying and selling imaginary pieces of papers will be put to better use.
Another way to think about it is that they did manipulate the market, so the ruling is fair, but the other party involved in the market manipulation was Interactive Brokers subsidiary Timber Hill, who should also be prosecuted for the part that they played in the market manipulation with their automated trades.
As it's a Norwegian-related story, shouldn't trolls be modded UP? .
They will never know the simple pleasure of a monkey knife fight
this is precisely why the economy has turned to crap, why there is a cycle of bubbles & busts and other various forms of shenanigans, it is all the greedy people that have gamed the system for extra profits have milked the cash cow and now there is no milk left and the cow is emaciated and about to die. greed & stupidity for short term profits at the expense of long term stability seems to be the norm now, i hope the economy does crash because i can live on beans & rice easier than those rich fatcats on wallstreet who will be jumping out windows again like they did in the crash of 1929 that ushered in the great depression of the 1930's, fuck all those stupid greedy bastards i hope they choke on their filthy money.
Politics is Treachery, Religion is Brainwashing
Synopsis:
while (true) {
if (stockMarket.isDown()) {
sueHumansRandomlyToCoverLosses();
else {
buyStock();
laughAtHumanMinions();<br>
printf("Greed is 01000111011011110110111101100100");
}
}
From the dark, old days of the Internet when men were men, women were men, and children FBI agents
More proof that there is no such thing as a Free Market -mindless mumbo jumbo promoted by the High Priests for their own enrichment
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
It is really all the other day traders who should be fined for not having good enough trading bots.
If it was a Sweden-related story, they'd be moded BORK
Now imagine when the stocks are moving sideways (not much lows or highs, a bit of a flat line). When moving sideways most people are less interested in the stockmarket and most will put their money in other investment. In these cases the majority of trades happen to be done with high frequent trading systems (HFT computers without human intervention who do the bidding). Now imagine if someone in this case can manipulate them, even indirectly.
I quote this article
High-frequency trading now accounts for 60 percent of total U.S. equity volume, and is spreading overseas and into other markets. These traders stand ready to buy and sell shares at all times, providing the liquidity that keeps markets moving. As a result, trading is now cheaper and easier than ever.Yet critics worry fast trading may undermine the integrity of the U.S. equity market, a bastion of capitalism and corporate America, and could even spark another financial crisis.
This but also in itself beares also the risk that those HFT's go haywire. These kind of events already happened.
Also at relatively low trade volume days, sometimes stocks movement are sometimes totally inexplicable, that's also much of the time high frequency trading at work. HFT's are a big liability, as they have the power to send shockwaves rippling through the stockmarket.
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.
Am I the only one to see something wrong with this argument? Yes it's in "cyberspace" (ugh) but that's exactly why it's not wrong.
Price is not the same as value. If I go to the open market shouting "I'll buy all your eggs at $10 each" and you go scrambling to buy them at $11, you're the stupid one.
If you blindly accept that the *value* of X is whatever the highest bidder says it is, you're pretty dumb. If you now set up an automated system that buys X at that price, you're even more stupid and deserve to be out of money. If you have an entire trading system that works on that premise, it's a total scam.
So, this is NOT the same as infecting people's computers, in fact it's the reverse. These idiotic machines are used to exploit the market system.
I'm sorry if I haven't offended anyone
I know one of the convicted traders from high school. He flunked Spanish (knew like five Spanish words after three years of classes) and generally wasn't mush of an academic talent (getting mostly C and D grades), but showed remarkable skills in applying what he learned in out business classes. He started daytrading in technology stocks when he was 18, and at the age of 20, he started his own profitable restaurant (while the rest of us were wasting our youth partying in college). How many 20 year olds starts a restaurant? Quite impressive!
I doesn't really surprise me that he could come up with a scheme like this. And I guess he soon will get good job offers from the major Norwegian brokers.
Dear Sir,
you are confusing cabbage with trolls. Please make up an appointment with your neurologist.
Yours sincerely,
Anonymous Coward, president of the united international federation of trolls (UIFT)
...so I want these 2 to burn in hell.
Then I want Interactive Brokers to fix their algos so that blond socialists can't game them any more.
it means private law .
Having glanced at the curt document it looks they used this method. They were caught by an automatic monitoring system, not Timber Hill, and it's noted that Timber Hill has changed their algorithm since then (but nothing about them making an an issue out of it.)
It looks like they started out slow, but got bolder and eventually the stock exchange shut down to investigate. Bet they got a chill when that happened.
What's the difference between an Iraqian and a Norvegian?
Answer: it would be quite unusual if the only victim of an IED would be an Iraqian... Iraqians tend to know their country, and which roads are dangerous. Apparently this Norvegian still needs to learn about the weird critters that live under the bridges of his beautiful country ...
The purpose of the stock market is to allow companies to raise outside capital from many investors in a flexible manner. That's the only 'purpose' of it, to the extent that it has one (stock markets were not designed by a grand planner, like most social institutions they just evolved). 'Worthiness of social ventures' never was anywhere in there, that kind of stuff is only ever said by academic economists (and academic economics has way less relevance to modern finance than, say, engineering does).
Can you define 'honest living' and 'society' by the way? To me these sound like they can mean pretty much anything. The only clearly 'non-honest' living is actually hurting other people - can you explain how high-frequency traders do that? Or does the fact that you personally don't see any 'social porpose' to what they're doing mean it's a despicable occupation?
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.
So when is this "Norwegian Day" ? My calendar only has american holidays on it (Oh yeah theres a few from Canada
Nobody has said anything about it around here, and you'd think they would being there is a lot of people with Scandinavian heritage.
Point Stealing is the technical term you need to look up.
Its where the bank/institution places an order before or after a clients trade, and often knowing where the stop losses are.
Second guessing when the bank is about to make a 'steal' is not that hard (midnight or settlement dates), nor is asking bank in tax haven to grab the steal (then tax free).If things are quiet, then the latency factor can to use to re-steal money in flight.
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.
9/11: Never forget it was a false-flag operation
Trades should be based on the average price over a minute or even an hour.
This would allow ALL the players on a market to adjust to new information fairly, rather than benefit only those that can afford high-speed trading.
Instead of trying to impose new fees on every trade, which will result, in some way or another, in those higher fees being passed to the small investors, legislators must find ways to level the playing field. With a level-playing field, short term speculation, that generate profits for a limited few and creates no wealth, will disappear.
Well, that actually makes more sense than TMB deciding to air their stupidity in public. :-)
How about microtrading? Where the trader exploits the connection to ensure they can sell on a microsecond (or less) resolution, making a little money each transaction?
Apparently, that isn't illegal, so why is this exploitation illegal? From my POV, no difference.
They did it in Superman 3 once.
If you aren't suspicious of your government's actions, you aren't doing your job as a responsible citizen.
I would say that's the risk you take when you automate any process really. As soon as you let a computer take over making decisions based on some algorithm (that is either great or a POS) you are taking a risk.
The fault is not with the people taking advantage of a shitty algorithm that doesn't work properly, its the fault of trusting your decisions to a shitty algorithm that doesn't work properly.
Making your own decisions and living with them is part of the game. Or entrusting those decisions to a human, who hopefully doesn't do a crappy job, or you fire them. In a "real world" human perception would see this BS, and not fall for it. So much of the market is now dependent on these stupid machine traders it is scary. A computer will always be subject to being inflexible in this respect until we get to the point of AI, and then likely the stock market will be the least of our worries...
Is what they did ethical? Probably not. However I think the actual fault is not theirs, but the users of the automated system.
We have a complete profession out here that manipulates prices. We call them valuers and they "determine" house prices. Only they are paid a percentage of their own answer, so the price is never too low and in the meanwhile at least 5 times what a house is worth. What you describe is called "trading". The one who is at fault here is the one who puts a computer in charge of the trade. Not the one who finds a client who is too stupid to take responsibility for his own actions and gives that responsibility to a computer.
Nae king! Nae laird! Nae yurrupiean pressedent! We willna be fooled again!
This will only get worse, and having stupid, arbitrary rules that some people can sneak around is not the way to go.
This reminds me of baseball, or (American) football which should be simple games, but get perverted by stupid rules in fringe cases.
Just make a simple definition that no one can get around and stick to it. It will change the game, but everyone will be able to see the rules and understand whether they can or should play.
Either:
- force all trades to go through a human at some point
- build in safeguards (like rules that say it can't be cancelled in the first 5 minutes), that effectively remove HFT
- remove all rules and let the fastest, best algorithms win
The article says they gave false info:
'In yesterday's conviction of the Norweigan traders, the prosecution said the pair had given "false and misleading signals about supply, demand and prices" when they manipulated several Norwegian stocks through Timber Hill's online trading platform.'
If they figured out the algorithm and then presented false inputs to produce results they wanted (to get it to make a trade with them), then that's a problem, no?
Either way, these people and others like them should just just trying to edge-case systems to line their pockets and go out and do something. Entire business have sprung up around high-speed trading, the principles of which are just to arbitrage faster. This doesn't really benefit anyone but these few individuals. They're just collecting all the half-pennies (as you may recall from Superman III) that would have gone to other people and scooping them into their pocket.
How about driving commerce instead? The idea of capitalism is that by harnessing the greed of people, they will produce better products and services for all of us and improve all our lives. This doesn't work when all they are doing is trying to be the one to complete a trade instead of letting someone else do it. The net advantage to society is nothing. So we should encourage other kinds of business instead of advanced arbitrage.
http://lkml.org/lkml/2005/8/20/95
Timber Hill should also be charged with illegal trading since it's algorithm was trying to profit by watching trades. The two men had a better algorithm so Timber Hill like a big baby goes running to the regulator's whining that what the better algorithm made more profit. How do we protest this injustice? How do we protest the control of courts by the big money?
I see that someone figured out "legally" how to play with your system and make you look like a fool,
so let's throw the book at them, but when we find out that you were being had by OUR system and that you
lost "xxx" (xxx= money, time, energy, stress...) because of it, then too bad for you.....this is our government.
The problem being, as we've recently seen in the May flash crash and similar smaller events in single names, is that HFT-based liquidity is not deep liquidity, and it dries up the second (or millisecond) that there's chaos in that market. Don't be confused - HFT liquidity is not AT ALL the same kind of liquidity that market makers are obligated to supply.
There is a moral argument why what was done by the pair of Norwegian traders is right and proper.
First the market's purpose is to reward those who are able to anticipate the future state and by doing this realize a fair value for all the participants. When Timber Hill became so large a force that by instigation of some sort the great weight of Timber Hill moves prices, then Timber Hill has in total fact become the market and cannot be protected by the court. This is one of the many benefits of the market.
What the Norwegian court has done is to protect and preserve a force that is a substantial part of the market and whose actions effect the market but not allow other smaller and tiny forces to include this force in their attempts to anticipate the future value of the market.