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.