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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.
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
http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html
"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.
> 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.
>>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.
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.
Well, that actually makes more sense than TMB deciding to air their stupidity in public. :-)