Convicted Norwegian day traders could be scapegoats / News / The Foreigner

The Foreigner Convicted Norwegian day traders could be scapegoats. The two Norwegian men sentenced for market manipulation may turn out to be the victims of flaws and changes in the automated trading industry. In what Dagens Næringsliv (DN) calls “one of the strangest economic criminal cases in Norwegian history”, Oslo District Court (Tingrett) found investors Svend Egil Larsen and Peder Veiby guilty of fixing the market by exploiting a weakness in US stockbrokers Timber Hill’s automated rapid-fire machine to make a profit. The Court found the two guilty of influencing the price of low-volume stocks for their own gain by working out how the system would react to certain trading patterns.

timber, hill, oslo, district, court, petter, veiby, svend, egil, larsen, shares, computer, sentence, thomas, peterffy,



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Convicted Norwegian day traders could be scapegoats

Published on Saturday, 16th October, 2010 at 15:16 under the news category, by Michael Sandelson and Ramona Tancau   .
Last Updated on 17th October 2010 at 11:17.

The two Norwegian men sentenced for market manipulation may turn out to be the victims of flaws and changes in the automated trading industry.



Surprises all round      

In what Dagens Næringsliv (DN) calls “one of the strangest economic criminal cases in Norwegian history”, Oslo District Court (Tingrett) found investors Svend Egil Larsen and Peder Veiby guilty of fixing the market by exploiting a weakness in US stockbrokers Timber Hill’s automated rapid-fire machine to make a profit.

The Court found the two guilty of influencing the price of low-volume stocks for their own gain by working out how the system would react to certain trading patterns.

One of them would buy a sizeable quantity of little-traded stock, making small purchases in the same shares as they went along. Timber Hill would then raise the response/offer in response to each new purchase.

According to the prosecution, the men bought at a higher price on their final trades just before they knew the shares would be sold at a lower one shortly afterwards. 

Larsen and Veiby were both given two-year suspended sentences of 90 and 120 days, respectively, and both were also ordered to pay damages equal to the sum of their profits. Larsen was fined 105,000 kroner, and Veiby had to pay 165,000.

“The verdict is very surprising to me and my lawyer. The Court says we have manipulated the market. We disagree,” Larsen told DN on Wednesday.

Espen Sirnes, associate professor of finance at the University of Tromsø, also found the Court’s ruling strange, because in his view a stock robot needs no protection from human intelligence.

“That's it, one loses and one wins in the market. I just cannot see that this robot should be protected,” he said.

DN believes “even the man who programmed the robot cannot understand Veiby and Larsen have done anything wrong. On the contrary, the two identified a weakness in Timber Hill’s program which, according to the verdict, led to the brokerage house eventually making it harder to fool the machine.”

Regrets?                                                          

What has happened once again raises issues about automated trade execution systems. The verdict comes just months after US exchange stocks took a huge plunge on 06 May because of a single algorithm.

Thomas Peterffy, the proprietor of Interactive Brokers Group owns trading company Timber Hill.

According to Steve M. Sears at Barron’s, an online subsidiary of The Wall Street Journal, Peterffy is “an architect of the modern securities market” who is “concerned the markets he helped create are at a dangerous turning point.”

In his recent speech to the World Federation of Exchanges in Paris, Peterffy said “Technology, market structure and new products have evolved more quickly than our capacity to understand or control them."

He admits he is now making changes to his operations.

“An exchange used to be a place – yes, a physical place -- where people would come together to buy or sell, hoping to achieve the best price for themselves…I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides,” Peterffy said in his speech.

Lucky guess?                                                             

Before Oslo District Court gave their verdict Petter Veiby’s defence counsel, Anders Brosveet, claimed proving both his client and Svend Egil Larsen had intentionally manipulated the market would be difficult.

He accused Timber Hill’s system to be at fault, arguing no rational investor would have interpreted their broker’s signals in the way the computer did. It lost money, whilst the investors made theirs, according to DN.

Moreover, Larsen also alleged there was no criminal intent behind his actions.

“I did not set out to trick the robot. But after acting against it a few times, you see how it behaves. The computer was fairly obvious.”

DN also raises questions as to the computer’s skills.

“The machine was obviously not the most advanced, even though it belongs to a US company that specializes in automated trading. It offered easy money for those who knew what to look for.”

Veiby and Larsen say they will be appealing the court’s decision.



Published on Saturday, 16th October, 2010 at 15:16 under the news category, by Michael Sandelson and Ramona Tancau   .
Last updated on 17th October 2010 at 11:17.

This post has the following tags: timber, hill, oslo, district, court, petter, veiby, svend, egil, larsen, shares, computer, sentence, thomas, peterffy, .





  
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