Timber Hill gets taken by traders

Discussion in 'Automated Trading' started by dont, Oct 14, 2010.

  1. dont



    Guest Post: In Defense Of A Robot

    Sep 30th

    Posted by Insurance in stock market

    Submitted by Frode Haukens of EconoTwist

    In Defense Of A Robot

    This must be one of the weirdest lawsuits
    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 robot’s owner, Timber Hill, has not
    been seen, nor heard from since the news story broke in August this

    “Either the robot is very, very stupid, or is the person who programmed the robot is very, very stupid.”

    Sven-Egil Larsen

    The case against the two traders in the so-called “robot-case,” where alleged manipulation of a the stock market
    trading machine is essential, started Monday. The Norwegian police
    believe that the day traders, Sven-Egil Larsen and Peder Veiby, has
    conducted a number of unlawful acts against the brokerage firm Timber Hill and its stock trading robot, and have charged them on grounds of market manipulation.
    “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 the case 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.
    “Timber Hill appeared in 2008 as a poor investor in
    selected papers and on selected days. Rather than do something about
    the obviously poor investor who moved prices randomly when only there
    was a small trade
    in a paper they were active in, the Oslo Stock Exchange have turned
    against them who has a different trading strategy than Timber Hill and
    made money off it,” he adds.

    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.

    Price Manipulation

    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.

    Christian Stenberg


    “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 have manged to make a
    pre-programmed trading robot at the brokerage firm Timber Hill to offer
    better prices than it should do.

    Stupid Robot
    Both Mr. Larsen and Mr. Veiby deny any accusations of any wrongdoings, and believe that they only found a weakness in a system.
    They emphasize that non other than the electronic player has been harmed.
    They admit, however, that they have exploited this weakness, but denies the accusation of manipulating the market.

    Larsen believes that either the robot is very, very stupid, “or is 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.

    Sven-Egil Larsen

    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.
    Quote Stuffing

    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
    During questioning, the police was interested to know
    what would be a “natural behavior,” and what perception the two traders
    had of the Timber Hill trading platform.

    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.
  2. Doesn't seem like something you could prosecute. They just found a way to play the system. Like the SOES "Bandits" of old.

    Unless, possibly, they were registered as "professional" and signed something that said they could never issue "false" and "misleading" quotes to try to move prices. Otherwise, seems like it should be more of a regulatory hand-slap kind of thing.

    Geez, even when IB loses...they win! :D
  3. I'm trying to figure out the illegal part of all this. So these guys were trading a stock and noticed a computer that did motion A which then caused them to do motion B and they profited from it. Seems to me like gamesmenship at its very best. Computers as we all know will pull their bids and offers in an instant. Who in this scenario was in the wrong? Trading is like poker, sometimes we bluff, sometimes we have the nuts, the market has always been this way and always will. This drives me crazy that they are trying to clean up the markets and focusing on the wrong guys. Go get the computers, they are at the center of all this.
  4. dave4532


    Why should the exchange care if the two made money from Timber? It smells like corruption to me. What is a real order by the way? Only the one that is executed? Then all HFT firm executives should go to jail.
  5. Iwas just thinking if you play on both sides of the market and are trying to capture small profits and you are using resources available to you to correlate to the stock you are trading, then cancelling orders and putting orders in is part of your system. I am trading 15 20 million shares a day sometimes, banging away like a monkey. I cancel orders all the time. Is that not allowed anymore in the market? .....................
    thats a rhetorical question
  6. Anyone who enters an order in the market is fair game.
    That's how I thought it worked.
    The exchanges blatantly favour the HFTs when they should be looking after all the different market participants and worrying about the integrity of the market as a whole.
    I wonder if this is a test case or a warning to anyone thinking of taking on the HFTs?