Slashdot Mirror
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.
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
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.
Need a Python, C++, Unix, Linux develop
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.
"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."
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.
Live today, because you never know what tomorrow brings
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.
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.
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
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.
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.
and the machines they beat were honest and genuinely based on real belief in the value of the stocks
gtfo
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.
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.
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."
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!
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.
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.
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?
Something bad is coming when people are suddenly anxious to tell the truth.
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
How cyberpunk.
-- Sorry, I can't think of anything funny to say here.
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
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
Bernard Baruch noticed that the ball tended to land opposite to heavy bets in a roulette game. He placed his his bets likewise.
After a bit he was asked to leave, but until then he was making money on someone else's crooked wheel.
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.
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.
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.
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
How about 99% of the posts here?
Those are reactions from around the world (though admittedly from seeming lunatics like myself).
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.
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.
"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.
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
Well, that actually makes more sense than TMB deciding to air their stupidity in public. :-)