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Norwegian Day Traders Convicted For Manipulating Computer Trading System

timothy posted more than 3 years ago | from the shades-of-eudaemonia dept.

Crime 299

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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299 comments

first (-1, Troll)

Anonymous Coward | more than 3 years ago | (#33905010)

first!

Re:first (0)

Anonymous Coward | more than 3 years ago | (#33905346)

fist prostate

Grammar Nazi time! (0, Informative)

Anonymous Coward | more than 3 years ago | (#33905012)

They were convicted of manipulating the computer system. They were convicted for getting caught (and not hiring a better lawyer).

first (-1, Troll)

Anonymous Coward | more than 3 years ago | (#33905014)

prost

It's still market manipulation (0)

Anonymous Coward | more than 3 years ago | (#33905020)

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.

Re:It's still market manipulation (5, Insightful)

Omnifarious (11933) | more than 3 years ago | (#33905064)

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.

Re:It's still market manipulation (5, Insightful)

Kjella (173770) | more than 3 years ago | (#33905190)

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.

Re:It's still market manipulation (1, Interesting)

Anonymous Coward | more than 3 years ago | (#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.

Re:It's still market manipulation (5, Insightful)

shitzu (931108) | more than 3 years ago | (#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.

Re:It's still market manipulation (3, Informative)

TFAFalcon (1839122) | more than 3 years ago | (#33905960)

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.

Re:It's still market manipulation (1)

CarpetShark (865376) | more than 3 years ago | (#33905712)

they manipulated that robot

And so it begins.

Re:It's still market manipulation (2, Funny)

Sulphur (1548251) | more than 3 years ago | (#33905884)

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.

Re:It's still market manipulation (3, Insightful)

umghhh (965931) | more than 3 years ago | (#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.

Re:It's still market manipulation (1, Funny)

Anonymous Coward | more than 3 years ago | (#33905696)

So basically stock market now is just another incarnation of COREWARS?

So a common folk unleashes her DWARF. Then the trading house unleashes ANTIDWARF to get all the money from DWARF. Then two norwegians run ANTIANTIDWARF and eat up both DWARF and ANTIDWARF profits.

Just wonderful :-/

Re:It's still market manipulation (-1, Flamebait)

Anonymous Coward | more than 3 years ago | (#33905864)

s/big investment house/bunch of hooky-nosed kikes/

Algorithmic trading? (5, Insightful)

AliasMarlowe (1042386) | more than 3 years ago | (#33905062)

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.

Re:Algorithmic trading? (5, Insightful)

hkmwbz (531650) | more than 3 years ago | (#33905074)

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.

Re:Algorithmic trading? (1)

MichaelKristopeit 13 (1916014) | more than 3 years ago | (#33905114)

the reason the protected robots are vulnerable to the attacks of the little guy robots are because they don't employ tactics that exploit the empowering platform

Re:Algorithmic trading? (4, Insightful)

phantomfive (622387) | more than 3 years ago | (#33905154)

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.

Re:Algorithmic trading? (1)

pyite (140350) | more than 3 years ago | (#33905208)

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,

Or it may give you a small portion. By providing liquidity, the price might have been 1 cent cheaper for you to buy than you otherwise could have paid.

Re:Algorithmic trading? (1)

jonbryce (703250) | more than 3 years ago | (#33905638)

And 1% cheaper to sell, so no difference there, except you will probably find it easier to find a buyer for your stocks.

Re:Algorithmic trading? (3, Informative)

EdgeyEdgey (1172665) | more than 3 years ago | (#33905892)

Liquidity is not provided because the HFT bid/offers get withdrawn.

A HFT is like a shop assistant getting a (tiny) cut of each transaction they process. They sit in between buyers and sellers collecting pennies, like market makers but without having to guarantee a market.

Re:Algorithmic trading? (1, Insightful)

Anonymous Coward | more than 3 years ago | (#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.

Re:Algorithmic trading? (5, Insightful)

ultranova (717540) | more than 3 years ago | (#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?

Re:Algorithmic trading? (5, Insightful)

Y0tsuya (659802) | more than 3 years ago | (#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.

Re:Algorithmic trading? (0, Troll)

twisteddk (201366) | more than 3 years ago | (#33905692)

It's a crime because you're exploiting a weakness in a computer system, and cheating people out of cash. Same as if you find a bug in MS and infect everyones computers with a trojan, intercept their paypal passwords, and steal the money in those accounts. The fact that you steal from cyberspace rather than a physical person, that's irrelevant.
It's illegal, plain and simple.

"Cheating" the system is easy, but checking algorithms will catch you every time. A "simple" way to cheat around 80-90% of automated brokering systems, and likely what the two Norweigians did:

Get two accounts with the system
Find a stock that rarely sells
Buy a ton of this stock with account 1 (low priced is good)
Place a BID for a few of the stocks significantly over current value with account 2
Price rises
Now sell all of your cheaply purchased stocks on account 1 at the new price

Bingo, you just made a million bucks !
But good luck trying to collect it at the bank, as you'll have FCC (or whatever they're called in your local country) closing your accounts within the hour, and reporting you to the police.

Re:Algorithmic trading? (1)

samjam (256347) | more than 3 years ago | (#33905772)

But if they had a machine that did this same thing "through a bug" it would have been OK.

Re:Algorithmic trading? (1)

twisteddk (201366) | more than 3 years ago | (#33905914)

Not being an expert in Norweigian law, I would assume that malicious intent would need to be existant for there to be a case worth taking to court.

Re:Algorithmic trading? (2, Insightful)

samjam (256347) | more than 3 years ago | (#33906026)

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..

Re:Algorithmic trading? (1)

whoever57 (658626) | more than 3 years ago | (#33906240)

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

The last time I looked, computers did not program themselves. Someone had to develop these algorithms. Someone had to write the code to implement them. More importantly, someone had to make the decision to attempt to use such algorithms to make money (I use the word "make" loosely here -- I think that such algorithms really just effect a transfer of money without any added value).

Legal here! (1, Informative)

Anonymous Coward | more than 3 years ago | (#33906162)

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.

Re:Algorithmic trading? (1)

N1AK (864906) | more than 3 years ago | (#33906214)

It's a crime because you're exploiting a weakness in a computer system, and cheating people out of cash

Why does it become a crime when you do this to an algorithm, but it's ok to do it when dealing with people? Someone has allowed a computer algorithm to monitor the market and buy and sell using their money. You're saying that they should get protection when the system doesn't work? It's not like they hacked the machine, they made transactions that the machine misinterpreted.

Trying to role out the hyperbole and compare making transactions with another party that agrees to the trade with stealing money with a computer virus isn't going to give you any credibility.

Lunatic blogger (1, Informative)

DerekLyons (302214) | more than 3 years ago | (#33905068)

"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.

Re:Lunatic blogger (0)

Anonymous Coward | more than 3 years ago | (#33905096)

Yeah, and black swans don't exist.

Re:Lunatic blogger (-1, Flamebait)

Anonymous Coward | more than 3 years ago | (#33905120)

Fuck you and your shitty meme grammar.

Convicted for being smart? (3, Insightful)

khchung (462899) | more than 3 years ago | (#33905088)

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!

In the USA (4, Funny)

srussia (884021) | more than 3 years ago | (#33905110)

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 [wikipedia.org] .

They hate it when other people cut in on their action.

I know these guys (5, Insightful)

ebonum (830686) | more than 3 years ago | (#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.

Re:I know these guys (3, Insightful)

Anonymous Coward | more than 3 years ago | (#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.

Re:I know these guys (-1, Redundant)

Anonymous Coward | more than 3 years ago | (#33905344)

I will take that as a no since no one modded this comment or appears to even have read it. Pathetic!

So many people miss the point (0)

Anonymous Coward | more than 3 years ago | (#33905132)

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.

"genuinely based on real belief in the value" (4, Insightful)

tlambert (566799) | more than 3 years ago | (#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

Re:So many people miss the point (2, Funny)

Anonymous Coward | more than 3 years ago | (#33905318)

and the machines they beat were honest and genuinely based on real belief in the value of the stocks

gtfo

Re:So many people miss the point (4, Insightful)

julesh (229690) | more than 3 years ago | (#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.

Re:So many people miss the point (1)

Bucc5062 (856482) | more than 3 years ago | (#33906262)

Lots of words to say, its gambling. Akin to betting on horses. I find it deplorable, but accept that it exists. What I would rather see is much stronger oversight or regulation of this level of gambling and calling it what it is, not "trading". Regulate as strongly as the gambling industry has today.

Joey "Two Tone" is not going to the track to "day trade on horses", he's going there to bet. Betting on a horse has less repercussions, though then betting on investors and stocks. The later effects companies, employees, and the greater economy, the former only those who bet on horses.

Re:So many people miss the point (0)

Anonymous Coward | more than 3 years ago | (#33905536)

I disagree with everything you just said.

First and foremost if people are running naive algorithms that can be gamed these crackdowns only serve to reduce necessary market pressure for firms to correct the underlying deficiencies in their systems. A single bogus postings to a wire service for example should not be able to trigger mass hysteria.

At the end of the day this sort of protectionism contributes to a frail and easily exploitable system more vulnerable to bad actors whos end goal may very well be chaos and NOT profit.

Buying and selling stocks in the space of milliseconds to extract money from the market is not illegal today but god knows I will never understand how a sane person could not conclude such activity does not constitute market manipulation.

I think the worlds markets would be better served by an outright ban of all automatic trading systems of any kind for any reason. If the trade is not important enough for a human to make manually then it should not be done. Screw the einsteins and their fucktardedly brilliant excuses.

Re:So many people miss the point (4, Insightful)

Magada (741361) | more than 3 years ago | (#33905652)

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?

Re:So many people miss the point (3, Insightful)

js_sebastian (946118) | more than 3 years ago | (#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.

smartass (3, Funny)

Anonymous Coward | more than 3 years ago | (#33905136)

"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."

How are they different from the Algorithm Traders? (0)

Anonymous Coward | more than 3 years ago | (#33905168)

If the Algorithms anticipate the market are they not anticipating and manipulating the market too?

The emperor has no clothes.

Obligatory (1, Funny)

uvajed_ekil (914487) | more than 3 years ago | (#33905176)

In soviet Russia, YOU control market.

Re:Obligatory (1)

Hognoxious (631665) | more than 3 years ago | (#33905486)

In soviet Russia, YOU control market.

How did you know I was really Vladimir Putin?

[whispers to henchman: kill him!]

Re:Obligatory (1)

Sulphur (1548251) | more than 3 years ago | (#33905724)

Vladimir Vladimirovich if you work for Amerikanskiis you could be Special Master or as they say Czar.

Re:Obligatory (0)

Anonymous Coward | more than 3 years ago | (#33905674)

but can you imagine what a Beowulf cluster of traders could do ?!?

Two articles from Financial Times (3, Informative)

Anonymous Coward | more than 3 years ago | (#33905262)

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.

Re:Two articles from Financial Times (1, Informative)

Anonymous Coward | more than 3 years ago | (#33905280)

A tale of man versus algo in Norway

By Andrew Ward in Stockholm and Jeremy Grant in London

Published: October 14 2010 22:27 | Last updated: October 14 2010 22:27

A court in Oslo has ruled it was market manipulation. For others, though, it is a tale of how two day traders outwitted the rapid-fire machines that have come to dominate financial markets.

Peder Veiby was trying to earn some money in the stock market to support his studies at the Norwegian School of Management when he was hit by a criminal charge for alleged market manipulation. Now he has found himself at the centre of a landmark legal case involving computer algorithms, or programmes, at the heart of automated trading systems.

Mr Veiby and another Norwegian day trader were handed suspended prison sentences and heavy fines on Wednesday after the court found them guilty of exploiting flaws in the electronic trading platform of a US broker to send "false and misleading signals" to the market.

The two men each worked out how to make money by predicting how the computer algorithm of Timber Hill, a unit of US-based Interactive Brokers, would respond to certain trades. They denied that this amounted to market manipulation but the court disagreed.

The case 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.

Algorithms are computer programmes that have emerged in recent years as trading has become fragmented across many different types of trading venues.

The trading landscape has been transformed beyond recognition in the US, where as little as a decade ago, most stock trading was executed manually, either on the floor of the New York Stock Exchange or on traders' desks.

The algorithms, "algos" in market jargon, are used by brokers and asset managers to help navigate this complex trading landscape. They are also used by firms using their own money to trade to submit thousands of orders in the blink of an eye. One type of algorithm, known as "efficiency" or "scheduling" algos, takes a large order, splits it into smaller pieces and sends it out to find a match periodically, finding the best possible price at the time.

Anders Brosveet, lawyer for Mr Veiby, says his client noticed a pattern in how the algorithm behaved while he monitored a long-term investment he had in a lightly traded Norwegian stock.

Mr Veiby found that the bid and ask prices moved up and down in tandem after each trade, making it easy to predict the spread between them.

He also noticed that the algorithm would respond in the same way to a small trade as it did to a larger one. This allowed him to buy a large number of shares at a low price and then make several smaller trades to bid up the price before selling out at a profit.

Svend Egil Larsen, the other defendant and a full-time day-trader for the past seven years, made the same discovery separately.

The two men did not know each other and it emerged in court that they had sometimes inadvertently undermined each other's strategies as they each made similar trades in low-volume Norwegian stocks whose prices could be moved easily.

"I did not set out to trick the robot," Mr Larsen told Norway's Dagens Naeringsliv newspaper. "But after acting against it a few times, you see how it behaves. The computer was fairly obvious."

The reaction among Norway's amateur trading community has been largely sympathetic towards the men, even though prosecutors claimed they made tens of thousands of dollars in profits at the expense of other investors. "How can we be able to make money if we are not smarter than the robots?" asked one commentator on an online forum.

That the two men made their discoveries separately has raised questions over whether other traders around the world could be doing the same. "Anyone who is observant and trading in a stock with low liquidity and a stupid computer [algorithm] can do this," said Mr Brosveet.

Algorithm experts in London said the two Norwegian traders seemed to have been using a "market-making" algo that post bids and offers out into the market, with the trader hoping to make money by capturing the bid-ask spread.

Niels Buhl, senior partner at Arctic Lake, which builds algorithms, said he had no knowledge of the Norwegian case but that it would be possible for someone to work out what an algo was doing by looking at market data, prices and any trading patterns that the algo had produced and working back from there.

"You can measure statistically what is happening in the market and do some forecasting," he said, but added: "It's not always easy to guess what an algo is doing otherwise a lot of people would be doing it."

Their defense is... interesting (1, Interesting)

kikito (971480) | more than 3 years ago | (#33905286)

“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.”

Re:Their defense is... interesting (2, Informative)

Nursie (632944) | more than 3 years ago | (#33905312)

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.

Re:Their defense is... interesting (0)

kikito (971480) | more than 3 years ago | (#33905992)

If the results are known with enough certainty, then the computer stops being an actor and becomes a passive element.

It's like saying "the gun might be jammed and not shoot this time".

Re:Their defense is... interesting (1)

Hognoxious (631665) | more than 3 years ago | (#33906218)

If a goalkeeper always dives to the left, he can't complain if an opposing striker aims to his right.

P.S. Your gun analogy above is the most retarded thing I've ever seen.

Re:Their defense is... interesting (1)

Ecuador (740021) | more than 3 years ago | (#33905494)

If it is your computer program and you give it the input you know is going to do what you want, you are responsible for it.
This is a more similar to armed bandits coming in town and you telling the folk to come out and check out their guns.
But all these analogies are pointless. It is well established that the stock market is a game and the big boys put expensive minds and machines to gain an advantage over the "common" players. It seems that these guys simply beat them at their own game, the "victim" in question did some bad trades, whether it was a live person doing them or the were pre-programmed (by a live - at the time of programming - person), that person lost money for his company - end of story.

Re:Their defense is... interesting (0)

Anonymous Coward | more than 3 years ago | (#33905546)

Your analogy is a terrible one. If we`re going to compare computerized trading to guns (I don`t know why but whatever...) I see it more like this:

The Timber Hill guys had a gun rigged to a computer that would shoot anyone wearing a red tie. The Norwegian day traders noticed this and decided to hand out a few red ties as gifts. Now they`ve been convicted for their interference, while Timber Hill is free to continue as they were.

Re:Their defense is... interesting (3, Insightful)

EJB (9167) | more than 3 years ago | (#33905592)

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.

Re:Their defense is... interesting (1)

Venerence (1421867) | more than 3 years ago | (#33905626)

That is a terrible analogy. Shooting someone in the head is clearly illegal. Trading with someone, as mutually agreed transaction, into bankruptcy is perfectly legal. It may be morally questionable, but just because people put their money in the hands of a computer doesn't make it any less legal.

Re:Their defense is... interesting (1)

shitzu (931108) | more than 3 years ago | (#33905646)

The logic fails, because the "gun" in question was not in their hands and they did not even directly trigger it.

Re:Their defense is... interesting (0)

Anonymous Coward | more than 3 years ago | (#33905676)

Vs
"They had an idea of how the market would change but that does not make them responsible for what the market did."

Re:Their defense is... interesting (0)

Anonymous Coward | more than 3 years ago | (#33906194)

Well, you obviously don't know a thing about "murder". There are plenty of legitimate reasons to shoot people in the head. Let's just start with self defense and then we'll move on to war.

A bad analogy is a bad analogy even when you dress it up in fear and hate.

Amusing they did it, amusing they were fined (5, Insightful)

Improv (2467) | more than 3 years ago | (#33905316)

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.

Re:Amusing they did it, amusing they were fined (0)

Anonymous Coward | more than 3 years ago | (#33905452)

"worthiness of societal ventures" What? The stock market was created to provide more liquidity. It is still changing constantly to provide ever more.

Re:Amusing they did it, amusing they were fined (1)

Nursie (632944) | more than 3 years ago | (#33905558)

I'm pretty sure it was invented for people to trade their interests in particular companies at market rates.

"Providing liquidity" is a nebulous description that could mean pretty much anything.

Re:Amusing they did it, amusing they were fined (5, Insightful)

Tom (822) | more than 3 years ago | (#33905602)

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.

Re:Amusing they did it, amusing they were fined (1)

JohnFluxx (413620) | more than 3 years ago | (#33906126)

And I still don't understand what drives it.

Take Apple stock. What's the actual value in buying Apple stock? The only value seems to be from selling it again to someone else who wants to buy it so that they can sell it again to someone at a higher price.

Is that really it, or is there something that I'm missing?

english version of the report? (0)

Anonymous Coward | more than 3 years ago | (#33905342)

Is there an English version of this report?

Wonderful.. (1)

cheros (223479) | more than 3 years ago | (#33905412)

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..

Re:Wonderful.. (1)

plumby (179557) | more than 3 years ago | (#33905958)

Doing any action with the primary purpose of manipulating share prices is illegal, and that's what it sounds like was going on here. They sold stocks with the intent of making that system behave stupidly.

Whether it should be illegal is another matter...

This type of thing happens in Banks all the time (4, Insightful)

awjr (1248008) | more than 3 years ago | (#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.

Re:This type of thing happens in Banks all the tim (4, Insightful)

Hognoxious (631665) | more than 3 years ago | (#33905518)

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.

Timber Hill beaten at their own game (1, Interesting)

Anonymous Coward | more than 3 years ago | (#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...

Re:Timber Hill beaten at their own game (1)

lucifron (964735) | more than 3 years ago | (#33906188)

AFAIK Timber Hill isn't involved in this, beyond losing some $$ by acting as a very naive market maker.

The two men were brought up on criminal charges for market manipulation, after the stock exchange flagged their trades as anomalous and reported them to the authorities.

YES! (0)

Anonymous Coward | more than 3 years ago | (#33905630)

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.

It takes two (0)

Anonymous Coward | more than 3 years ago | (#33905668)

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.

RE:"gotten some sympathetic reactions" (0, Troll)

FudRucker (866063) | more than 3 years ago | (#33905830)

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.

The next Wall Street will be boring... (3, Funny)

carmaa (1006965) | more than 3 years ago | (#33905850)

Synopsis:

while (true) {
    if (stockMarket.isDown()) {
        sueHumansRandomlyToCoverLosses();
    else {
        buyStock();
        laughAtHumanMinions();<br>
        printf("Greed is 01000111011011110110111101100100");
    }
}

Tip of the Iceberg (0)

Anonymous Coward | more than 3 years ago | (#33905854)

More proof that there is no such thing as a Free Market -mindless mumbo jumbo promoted by the High Priests for their own enrichment

Intriguing (5, Informative)

The Dodger (10689) | more than 3 years ago | (#33905876)

I'm not a lawyer and I don't speak Norwegian so I can't read the court document to find out exactly what happened. I am, however, an electronic trading specialist and I've also been a trader at a big American investment bank (one that didn't go bust, by the way, despite my best efforts).

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 mid to set the bid/ask but which didn't have a bulletproof failsafe built in to recognise when there was noone else in the market. I foolishly assumed that the trader wouldn't use the algorithm unless there was a liquid market. Early one morning, the trader comes into work and switches on all his quotes before he's had his coffee. Nobody else was quoting this particular instrument at the time and someone else realised that they could effectively "fool" my trader into moving his price by submitting a quote which would move the mid, resulting in the algo moving my trader's price. They did this and then hit him for an unrealistic price. Cue panicked phone call from the trader, what the hell's going on, blah blah blah. We managed to get the trade cancelled in the end, because the price was so unrealistic but, even if we hadn't, it would never have occurred to us to complain about market manipulation. We would have just sucked it up, learnt the lesson and moved on because, quite frankly, if we'd spotted an opportunity like that, we'd have done the exact same thing!

Mind you, there are limits - Google Citigroup Dr Evil Trade [google.com] for an example.

D.
..is for Don't Try This At Home!

Re:Intriguing (1)

grahamm (8844) | more than 3 years ago | (#33905930)

Maybe a silly or naive question, but why would any one person want to simultaneously buy and sell the same stock? If I want more of it, I will put in a bid to buy and if I want less of it then I will offer for sale. Which I do at any one time might change with the price that other people are offering or asking, but at any one time I would be either bidding to buy or offering for sale - not both at the same time.

Re:Intriguing (1)

ShruggingAtlas (1922206) | more than 3 years ago | (#33906220)

The Dodger is not talking about investing for a savings portfolio, but about "Market Making" which is when an organization commits to making sure there is liquidity in a certain market by always providing a price at which they will buy and one at which they will sell. It is then up to the market maker to set his prices such that he makes a profit on the spread. There is nothing wrong with setting the quotes at (bid/ask) $0.01 / $1.000.000.

Re:Intriguing (1)

The Dodger (10689) | more than 3 years ago | (#33906252)

Well, in an ideal world, you profit from the spread - e.g. you buy at 99.99 and sell at 100.01, thereby making a profit of $0.02 on each share. That's what happens in liquid markets, where there are plenty of buyers and sellers putting in market orders.

It's not really all that different to what Asda does with cans of beans - buy 'em from one person and sell 'em to another for a higher price.

There are "official" market makers on the NYSE and (I think still) on the London Stock Exchange.

Re:Intriguing (2, Informative)

lucifron (964735) | more than 3 years ago | (#33906238)

AFAIK this was a criminal case, and Timber Hill aren't involved beyond acting as a naive market maker.

Blame society (1, Interesting)

Anonymous Coward | more than 3 years ago | (#33905904)

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

low volumes (0)

Anonymous Coward | more than 3 years ago | (#33905928)

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 [thomsonreuters.com]

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 [moneymorning.com] 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.

Victim vs culprit (1)

clint999 (1277046) | more than 3 years ago | (#33906052)

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.

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