The two Norwegian day traders, charged with market manipulation for having outsmarted the Timber Hill trading robot, was Wednesday morning convicted in Oslo District Court. Svend Egil Larsen and Peder Veiby received a suspended sentence of, respectively, 90 and 120 days in jail. In addition, the profits made on the trading is being revoked. However, this story is far from over.
“It kinda sucks to be convicted of something the whole industry believes should be allowed.”
Svend Egil Larsen
Svend Egil Larsen and Peder Veiby were both found guilty in the Oslo District Court, Wednesday, of having manipulated the stock market. The Norwegian authorities believe that the two day traderne violates acceptable market behavior, and that their trades caused the Timber Hill trading robot to move the share prices without a legitimate reason. The so-called robot case is likely to end up in the Supreme Court of Norway.
According to the court ruling, the two have deliberately manipulated the stock market.
Svend Egil Larsen is sentenced to 90 days in jail (suspended sentence) and confiscation of NOK 105.000 kroner.
Peder Veiby got a 120 days suspended prison sentence and confiscation of NOK 165,000.
Both traders have been given a probation period of two years, according to the court documents.
No Man Against Machine
Police Attorney Christian Stenberg made clear during his procedure that this is not a matter of “man against machine”.
The authorities believe the behavior of the two day traders violates acceptable market behavior, and that the trades that caused the Timber Hill robot to move the prices did not have a legitimate reason.
“The court have found it proven that defendants intermediate trade orders, the order was entered after the initial purchase/sale, and before they reversed their positions and started the trading strategy over again, was added with a purpose to make the TMB raise or lower its prices,” the verdict says.
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Manipulated The Whole Market
The judges believe the two gave false and misleading signals about supply and demand, as well as the price of the shares involved.
“The defendants did not buy or sell on these intermediate transactions. The purpose was solely to provoke a reaction in the TMB system, so that the accused could buy or sell at more favorable prices,” the court ruling says
The three judges have also found it proven that the two day traders deliberately manipulated the whole stock market.
“The defendants did not only try to profit from price volatility in the market, which is normal in day trading, they also sought to profit from price reductions in a market they created themselves. By influencing another party – Timber Hill – it had an impacted on the whole market.”
Going To Appeal
“I believe that the court is interpreting the law incorrectly, and also interprets the purpose of the law wrong,” says defence lawyer Anders Brosveet to the website DN.no.
He says he is very surprised by today’s ruling at the Oslo District Court.
“The main issue is that there were in fact real transactions completed, transactions that in my opinion will never meet the statutory criteria of being false, inaccurate or misleading,” says Brosveet with reference to the Norwegian Securities Act, paragraph 17-3.
The now-named “robot case” has caused debate amongst both Norwegian and international financial market participants.
“We have seen that this is an issue of such fundamental principles that it probably will end up in the Supreme Court,” Brosveet says.
“Of course, we’re gonna appeal this,” he says, hurrying to reach another case in the Norwegian Supreme Court. “I’m sure this case will end up there, too,” he concludes.
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Here’s a copy of the verdict by the Oslo District Court (In Norwegian only).
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It Sucks!
“I’m very surprised,” the convicted day trader Svend Egil Larsen says, according to stocklink.no.
Larsen will now to go through the verdict with his attorneys before making a final decision. However, he does not hide the fact that they are already considering an appeal.
“My lawyer is going to read the verdict more closely to understand what the court’s intentions really is. Based on what we have read so far, we are going to appeal,” Larsen says.
Adding: “It kinda sucks to be convicted of something the whole industry believes should be allowed.”
Completely Incomprehensible
Meanwhile, Mr. Larsen and Mr. Veiby seems to have the full support of everyone, besides the Oslo District Court and the Oslo Stock Exchange.
Editor at DN.no, Ole-Morten Fadnes, writes in a commentary:
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“The court believes that the two defendants acted deliberately. Undoubtedly. The court also believes that the two accused had knowledge of how the Timber Hills machine acted. Undoubtedly. The two found a weakness and exploited it. It is also true that their trades moved the price of these illiquid stocks. But it is almost completely incomprehensible how this could be illegal.”
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Related by the Econotwist’s:
- In Defence Of A Robot
- Update: Day Traders Crack The Timber Hill Trading System
- Espen G. Haug: Algorithms Should Be Monitored On A Daily Basis
- Illegal To Outsmart A Trading Robot, Expert Says
- Oslo Stock Exchange Comments On Market Manipulation
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Espen G. Haug: Algorithms Should Be Monitored On A Daily Basis
Leading derivative expert, author and regular contributor at the Econotwist’s, Espen Gaarder Haug, says algorithms have many weaknesses and should be monitored on a daily basis by people with extensive market knowledge and experience. The former Norwegian Wall Street trader have a thing or two to say in relation to the ongoing circus at Oslo District Court – also known as the “robot case.”
“Should the major players be allowed to carry on trading algorithm with no monitoring, without people with broad market experience monitoring them?”
Espen Gaarder Haug
The day traders in the so-called “robot case” – now appearing before the Oslo District Court accused of market manipulation – run their scheme undisturbed for nearly six months. First, when the Oslo Stock Exchange contacted the brokerage and investment firm that owned the shares that the robot was trading, the alarm was raised and the possibility to manipulate the trading program was removed.
“A rational investor would have plugged these holes quickly,” Dr. Espen Gaarder Haug comments.
“If you choose to outsource market making to a computer and you lose money.. I mean, you just have to accept it,” he adds.
Espen Gaarder Haug holds a Ph.D. from NTNU and is regarded as one of the worlds leading experts on derivatives and option pricing models.
His book “The Complete Guide To Option Pricing Formulas” is seen as “The Bible” by many fund managers and derivative traders.
He has worked almost 17 years as a trader on Wall Street, among others, at JP Morgan and Chase Manhattan Bank.
He has also worked as an active manager of multi-billion dollar hedge funds, like Amaranth and Paloma.
Dr. Haug underlines that he don’t know anything about robot manipulation other than what’s been written in media, but says he recognize similar issues from his experience in the international financial industry.
He believes that the trading algorithm requires good internal monitoring y individuals with broad market experience.
“I know many who run algorithm trading, and they’re always following the trades with several well-qualified employees – and often by the one who created the algorithm,” he says.
There’s Always A Risk
“Robot trading always involves a risk of weakness in the algorithm,” Haug points out.
The ongoing court case in Oslo have revealed that the two charged day traders was able to exploit the same weakness over and over again.
Timber Hill (who is a part of the Interactive Broker Group) was not aware of this before the Oslo Stock Exchange contacted them on March 14th this year.
Testifying before the court on Tuesday, Thomas Borchgrevink, manager of market surveillance at the Oslo Stock Exchange, said: “I felt that they were not aware of this. They were not on the ball.”
Timber Hill closed down, temporarily, the robot in question when the Oslo Stock Exchange made them aware of the error, and has since modified the algorithms.
Chill, Timber Hill
Espen Gaarder Haug assumes that the Timber Hills algorithm was not only used to make trading in stock (so-called market making) in the Hafslund (B shares), Wilh. Wilhelmsen and Odfjell (B shares), which is relevant for this trial.
There may be several reasons why a brokerage firm choose to let a robot trade without supervision, he says.
“They can, for example, have too much faith in their algorithm, so they do not fear failure. It may also be that they trade many shares in as many markets as possible, so that each share has little importance. And they choose to take a risk that in some cases leads to losses”.
“Around-the-clock monitoring is costly, but the algorithms have many weaknesses and should be monitored on a daily basis by people with extensive market knowledge and experience,” he notes.
Mandatory Monitoring?
Haug believes it is reason to ask whether monitoring should be mandatory:
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“Should the major players be allowed to carry on trading algorithm with no monitoring, without people with broad market experience monitoring them?” Dr. Haug asks.
He believes naive algorithm trading, could not only harm itself, but at worst, damage the entire economy by reinforce large price movements.
Espen Gaarder Haug predicted in detail the financial crisis by the end of 2006, beginning of 2007, in a series of interviews and articles published by the Norwegian-The-Economist-peer – Økonomisk Rapport in 2007 and 2008.
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“Although it is difficult to prove, there are good indications that the US stock market crash in 1987 was reinforced by the naive algorithm trading. The algorithms were based on a number of imaginative assumptions that broke completely with the crash. Some major players followed their naive algorithms slavic and sold more and more the more as the market dropped based on signals from the algorithms they slavishly followed,” Dr. Haug says.
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www.espenhaug.com
Related by the Econotwist’s:
In Defence Of A Robot
Update: Day Traders Crack The Timber Hill Trading System
Oslo Stock Exchange Comments On Market Manipulation
Illegal To Outsmart A Trading Robot, Expert Says
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