AXA Rosenberg's Attempt To Conceal Its Quant Glitch Costs $242 Million

Tyler Durden's picture

So much for quant trading being an innocent program that can never do any harm. After a year ago AXA Rosenberg disclosed that it had kept its clients in the dark about a massive error in the computer code of its "quantitative investment model", today the SEC fined the  one time asset manager of over $70 billion with a record for its kind fine of $242 million. As a reminder the immediate effect of the error when first reported was the major underperformance of the fund compared to its peers: "A number of the funds managed wholly or partly by AXA Rosenberg performed poorly last year." Yet what supposedly did not alert the firm that anything was wrong was that the system was performing in line with other comparable models: ""It wasn't obvious if there were any problems or
any impact from this error on our fund because it followed a similar
trend to other quant managers
," Vanguard spokeswoman Rebecca Katz told
Reuters on Saturday." In other words, it is safe to assume that other AXA peers have or had been operating with comparable system flaws, yet due to the SEC's preoccupation with porn, had never been caught, and as a result investors in such funds may have well been fleeced of millions due to comparable uncaught computer glitches. So much for robotic efficiency, especially when coupled with a human's eagerness to engage in willful securities fraud...

From today's SEC announcement charging AXA Rosenberg with Securities Fraud, and imposing a $242 million fine:

The Securities and Exchange Commission today charged three AXA Rosenberg entities with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The error caused $217 million in investor losses.

AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) have agreed to settle the SEC's charges by paying $217 million to harmed clients plus a $25 million penalty, and hiring an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel.

The SEC's order instituting administrative proceedings against the firms found that senior management at BRRC and ARG learned in June 2009 of a material error in the model's code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time.

"To protect trade secrets, quantitative investment managers often isolate their complex computer models from the firm's compliance and risk management functions and leave oversight to a few sophisticated programmers," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors."

The SEC additionally charged BRRC with failing to adopt and implement compliance policies and procedures to ensure that the model would work as intended.

Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office, added, "Quant managers need to ensure that their compliance policies and procedures are tailored to the risks of their model's strategies, and that compliance personnel are integrated into the development and maintenance of their investment models."

What happened with AXA will soon enough happen with all other HFT firms, that today are still all the rage, but following the next major market meltdown that not even all the talent of Sack Frost will be able to recover from, the ensuing scapegoating will immediately focus on blaming those most defenseless and most silicon endowed: the various collocation boxes that do nothing but "provide liquidity." And as a reminder, scalping and frontrunning HFT algos collect rebates in up markets... as well as down.