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Norwegian traders convicted for outsmarting US stock broker algorithm

Norwegian traders convicted for outsmarting US stock broker algorithm

The two traders were found guilty of market manipulation

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Two Norwegian day traders who hoodwinked a trading system in the US for their own financial gain, have been handed suspended prison sentences.

The Norwegian traders, Svend Egil Larsen and Peder Veiby, were handed suspended prison sentences and fines for market manipulation after outsmarting the trading system of Timber Hill, which is a unit of US-based Interactive Brokers.

The two men managed to work out how the computerised system would react to certain trading patterns. This allowed them to influence the price of low-volume stocks for their own gain.

The news brings the role of automated trading systems, with complicated algorithms, back under scrutiny. High-volume algorithmic platforms are playing an increasingly important role in trading globally, with stock exchanges investing heavily to ensure their own networks meet the demand.

The Timber Hill case follows the more serious “flash crash” which happened this May, when a single algorithm triggered a huge plunge in US stocks. The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) earlier this month released a joint report on the flash crash. The report blamed an automated trade execution system for the 6 May stock market crash, which affected trading worldwide.

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.

Anders Brosveet, the lawyer for Veiby, admitted that his client had learnt how the Timber Hill trading algorithm would behave in response to certain trades. However, he denied this amounted to "market manipulation".

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

Both men are considering appeals against their convictions and fines. Veiby, who made the most trades, was sentenced to 120 days in prison, which was suspended for two years. He was fined the Norwegian equivalent of around £18,000.

Larsen received a 90-day suspended sentence, along with a fine of around £11,500. The fines in both cases were about the same as the profits made as a result of the illegal trades.

Despite their convictions, online message boards in Norway have praised the mens' skill in "outwitting the machines".

In otgher algorithmic trading news, a survey this week revealed that software developers at hedge funds with experience in the technology have seen their bonuses double in a year. 

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  • MSM disgusted Good for themNow finally a software that evens the playing field and allows the retail investor to compete and win against the big institutional algo traders httpwwwSuccessRobotcom
  • discouraged citizen You are simply ignorant
  • Brock_vond There is no difference between this and insider trading nuff said If Martha Stewart has to go to jail then so do these guys
  • Guest1974 I dont get it They observed the market and worked out how the market reacted to certain conditions and used that knowledge to make money Thats what all traders do The machines connected to the market are just part of it If theyd done something like sent bad data which then exploited a bug in the system that would be different All they did was buy and sell shares from a poorly written piece of code Replace the computer with an inexperienced junior trader and you could get the same result
  • Sunil Shah They could go to school and learn to spell words like leeching and when not to pluralise value
  • Denniscb Computer systems held by these companies are there specifically to manipulate stock prices to make money for the owner THEY are manipulating the stock price otherwise the pattern that these people identified would not have been effective So the brokerages can manipulate the market to make money but anyone that finds out how to manipulate the software that manipulates the market is the bad guy What a total load of crap Norway should be ashamed of their legal system They should have charged IB for total incompetence instead
  • Cellar So who is responsible for running those automated trading systems The external people originating the data fed into the systems I think notIt has been a long-standing and oft-violated basic rule of computing that you simply cannot trust external data so dontAs noted this is exploiting someone elsess bot and Im not even sure we ought to let bots run amok with the game in the first place certainly not unsupervised Somebody has to be responsible and that someone would be the operator of the botId appeal if there was a chance the judge understood the finer points of this at all But there probably isnt and the notion of responsibility itself has been thoroughly eroded and corroded by among other things american sueism
  • Nomail basicly Im a bad gamblerbrokerprogrammer I try to make money out of gambling on virtual values Some guys gambling on the same virtual values are outsmarting me They are criminals The whole concept of making money on valuetransactions is sick So many resources and talented people focusing on this tradinggambling business and not making any values The idea of owning a share of a company is ok but making money on stocktrading is wicked Would like to se a time limit on every stock so it can only be traded 2-4 times a year and with a 5 VAT on every transaction on top of thatJust think of all the suits then having to actually so something valuablusefull instead of leaching on the free market
  • guest869 no banned for exploiting someone elses bot
  • Ghoul67890 Banned for exploiting game mechanics
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