This must be one of the weirdest lawsuit we have seen in long time: Starting this week, the two Norwegian day traders who are charged with fraud and violation against an automatic trading robot will appear in Oslo District Court to defend their actions. However, the poor robot, being called a stupid, cheating liar, have the best representatives any offended robot can have; a hard-hitting police attorney, backed by an army of experts from the Oslo Stock Exchange. The robots owner, Timber Hill, has not been seen, nor heard from since the news story broke in August this year.
“Either the robot is very, very stupid, or the person who programmed the robot is very, very stupid.”
“This case should never have come up before the court. It is the Oslo Stock Exchange who has initiated proceedings against the accused and the court will lead the crusade. None of the authorities that have looked at the case, neither the Financial Authority or the police, seems to be able to look at it with competent and critical eyes. For this reason, we now have a case that hardly anyone in the market can understand,” says Mr. Larsen’s lawyer, Halldor Christen Tjoflaat, according to the website Stocklink.no.
The two Norwegians are accused of price manipulation of shares listed at the Oslo Stock Exchange, during the period November 2007 to March 2008.
Oslo Stock Exchange is in a strategic alliance with London Stock Exchange where Timber Hill is a member.
According to the charges, the day traders placed over 2,200 orders, and managed to give the market a false picture of supply and demand.
“We believe the two are guilty of a numerous cases of price manipulation. They have added buy and sell orders that was not real, they have had another motive; namely to move the price,” prosecutor Chris Stenberg of the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (Økokrim) told the newspaper Dagens Næringsliv, when the lawsuit was filed.
“It’s not about fooling anyone, but to be smarter than someone,” one of the traders says.
Sven-Egil Larsen and Peder Veiby was among the most active equity traders on the Oslo Stock Exchange in 2007 and 2008.
According to the allegations, they manged to make a pre-programmed trading robot at the brokerage firm Timber Hill offer better prices than it was supposed to do.
Larsen believes that either the robot is very, very stupid, “or the person who programmed the robot is very, very stupid,” he says.
Larsen was the one that first found the weakness in the Timber Hill system when he was doing arbitrage trading in low liquidity stocks at OSE. Peder Veiby was long in Hafslund and had followed the stock over a longer period. This made Mr. Veiby able to form a picture of automated systems trade patterns over time and found that Timber Hill had its special way of behavior. He observed how the Timber Hill system changed the level of price and orders, and decided to try to make money on this behavior.
It all began in November 2007 and lasted until March 2008.
Mr. Veiby considers it likely that he would have made money on the deals.
Both traders purchased a large chunk of stocks at a specific price, followed by series of smaller purchases at a higher price. All within a short periode of time.
The Timber Hill robot reacted by raising the price on the shares, and Larsen and Veiby did what every skilled trader would do; they dumped their holdings and secured the profit.
They also did the same exercise by shorting shares, but then making the profit by selling to the ever lower price.
According to the two traders statement in court, it was not every time the strategy succeed.
Occasionally, the robot did not react as they had anticipated, usually caused by other players preventing the trade pattern to repeat itself, they explained in court.
200 Trades A Day
In their statement they also says that they was surprised every time it was possible to get the robot to repeat the same pattern.
Veiby is charged with 42 cases of violations of the Securities Act’s, while Larsen is charged with 30, involving a total of 2.200 transactions.Larsen estimates that during 2008, he made about 20.000 trades, which indicates between 100 and 150 trades per day, on average.
Veiby estimates that he performed about 60 to 70 trades per day during the period.
Asked by the judge, Larsen and Veiby said that they did not knew each other before this case, and that they had not been cooperating.
On the contrary, they had by several occasions destroyed each other’s plans.
Police attorney Christian Stenberg will only make general comments, and not go into details.
He believes the two defendants placed orders with the purpose of moving the price, and since the market relates to the quotes provided by the exchange (the robot) it would be a form of manipulation.
The District Court in Oslo has to the decide on the rather interesting question whether this is illegal, or not.
“The question is whether the orders that was entered is legitimate. That’s for the court to decide,” the police attorney says.
No Sign Of The Robot Owner
However, the public prosecutor did not offer any explanation as to why representatives of the Timber Hill was not summoned as a witness.
Peder Veiby’s lawyer, Anders Brosveet, said in his procedure that it was not the two defendants who moved prices, and claimed it was Timber Hill since they deleted their own orders and then raised the price.
The problem is that the brokerage firm’s robot was so poorly programmed that it failed to pick up signals that any rational market participant would do, he argued.
We might expect a ruling by the court at the end of the week.
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