Two Norwegian day traders have been sentenced for market manipulation after they figured out how an investment firm’s algorithmic trading system behaved and used it to their advantage.
Svend Egil Larsen and Peder Veiby independently worked out how US firm Timber Hill’s trading system reacted to certain patterns in trading activity. They then used it to influence the price of various trades. The defendants dispute that this constitutes market manipulation and are appealing the ruling.
Larsen told a Norwegian newspaper that he had not set out to “trick the robot” but that the system was “fairly obvious”. “After acting against it a few times, you see how it behaves,” he said.
Earlier this month, an SEC investigation found that the ‘Flash Crash’ of 6 May 2010, in which share prices fell by billions of dollars and immediately recovered, was started by a single automated trading system. Investment firm Waddell & Reed’s system sold $1.4 billion worth of stock index futures in just 20 minutes, triggering a chain reaction of automated deals that caused the share prices to fall.