Time To Revisit RenTec's Allegedly Illegal Dark Pool, Limit Order And Swap Transaction Strategies

Tyler Durden's picture

These days a surprising number of people have sprung up to defend the integrity and the role of High Frequency Trading in maintaining an orderly and efficient market (some of these are legitimate and bring good ideas to the table, many of them alas are simply deplorable, arising from the frontal cortex of tabloid journalists who have never seen a VWAP algo in action yet staunchly repeat whatever the mantra de jour is with the steadfast determination of a kamikaze bomber). Yet, for one reason or another, two former employees of multi billion quant fund Renaissance had other ideas when in the summer of 2007 they filed a lawsuit against the East Setauket purveyor of 2600 processing cores, alleging major fraud and illegal market activity related to various of RenTec's trading strategies. While the market in 2007 was, ironically, much more rational (if just a "little" overvalued), now that HFT has crept to dominate virtually every vertical of trading, it bears recalling some of the details presented by Alexander Belopolsky and Pavel Volfbeyn, at the time employed by yet another quant fund in all but name (which has and always will compete with Stevie Cohen's SAC for the fund with the fastest revolving door policy), Israel Englander's (he of 740 Park fame) Millennium Partners.

While much of the details of the original lawsuit are shrouded in secrecy due to "trade secret disclosure", the redacted, public version still contains some very curious pieces of information, which some of our more astute readers may be able to pick up and connect an occasional dot.

The lawsuit, which was essentially a response to a prior lawsuit filed by RenTec for trade secret porting by the two MIT Physics Ph.D's into Millennium, in some ways almost reads like a smear campaign. We will ignore any substantive conclusive claims (as these events were likely settled quite amicably), and instead will focus on the snapshot of time afforded by this one unique filing.

Curiously, some of the names and concepts touched upon back in 2007, which incidentally refer to a time when the two MIT grads were still employed by RenTec, a period between 2001 and 2003, read like the who is who of the Flash, HFT, and program trading funny pages in the Mainstream Media nowadays.

The facts.

From the filing:

130. While employed by Renaissance, Dr. Volfbeyn's superiors repeatedly asked him to assist Renaissance in conducting securities transaction that Dr. Volfbeyn believed to be illegal.

The illegality of these activites touched upon three main topical areas:

ITG-POSIT (The Dark Pool angle)

131. In particular, Dr. Volfbeyn was instructed to devise a strategy to defraud investors trading through the Portfolio System for Institutional Trading ("POSIT"). POSIT is an electronic trading system operating by Investment Technology Group ("ITG" ). POSIT collects buy and sell orders from large traders and attempts to match them.

132. On information and belief, POSIT is completely confidential. It does not reveal information about orders to anyone. For its customers, this confidentiality is an essential aspect of the system.

133. Renaissance asked Dr. Volfbeyn to create a computer algorithm to reveal information that POSIT intended to keep confidential [REDACTED]

134. Renaissance intended to, and did, use this trading strategy [the POSIT strategy] to profit [REDACTED]

135. Dr. Volfbeyn believed that [REDACTED] [the POSIT strategy] violated securities laws. He expressed his opinion to his superiors at Renaissance and refused to build the computer algorithm as they requested.

Limit Order Strategy [Stealing Liquidity]

139. Renaissance asked Dr. Volfbeyn to develop a computer algorithm [REDACTED] [the "limit order strategy"]

140. A limit order is an instruction to trade at the best price available, but only if the price is no worse that a "limit price" specified by the trader. Standing limit orders are placed in a file, called a limit-order book. Limit-order books on the New York Stock Exchange and NASDAQ are available to be viewed by anyone.

141. By [REDACTED], Renaissance intended to profit illegally.

142. Dr. Volfbeyn refused to participate in such activities. He explained that his refusal was based on his belief that the proposed transactions violated securities laws [2nd time RenTec allegedly used an illegel strategy]

143. Senior Renaissance personnel, including Executive Vice President Peter Brown and Vice President Mark Silber, attempted to persuade Dr. Volfbeyn to engage in the [REDACTED] limit order strategy, despite his objections. Mark Silber is the compliance officer for Renaissance, responsible for implementing systems to ensure that Renaissance does not violate the securities laws, and for protecting employees who complain about potentially illegal conduct.

144. On information and belief, Renaissance did not implement the [REDACTED] limit order strategy prior to Dr. Volfbeyn's termination. [What about after?]

Swap Transactions [The Naked Short Scam]

145. At all times relevant to this action, Rule 3350 of the NASD, prohibited NASD members, with certain exceptions from effecting short sales in any Nasdaq security at or below the current national best (inside) bid when the current national best (inside) bid is below the preceding national best (inside) bid in the security.

146. At all times relevant to this action, Rule 10a-1 under the Securities Exchange Act of 1934 provided that, subject to certain exceptions, an exchange-listed security could only be sold short at a price above the immediately preceding reported price or at the last sale price if it is higher than the last different reported price.

147. During the period when Dr. Volfbeyn and Dr. Belopolsky were employed at Renaissance, plaintiff engaged in a massive scam [REDACTED] [the "swap transaction strategy"]



150. Renaissance conducted [REDACTED] in violation of Rule 3350 and Rule 10a-1. Renaissance also intentionally [REDACTED] in violation of SEC and NASD rules. [REDACTED] Renaissance profited from the strategy [REDACTED].

151. Researchers at Renaissance expressed their concern to Executive Vice President Peter Brown and other officials of Renaissance about the legality of these swap transactions, including concerns that the transactions violated the tax laws and securities laws. Renaissance failed to halt the transactions. On information and belief, the swap transactions are continuing and generate substantial profits for Renaissance.

Zero Hedge makes no claim to the validity of any of these claims: we merely report what a former employee  of Renaissance claimed the quant fund was doing in violation of a variety of securities laws. Keep in mind, that while Renaissance is the undoubted master of controlling market liquidity (presumably legally, however this filing indicates extensive premeditated illegality), all this was occurring back in 2001, when HFT, PT, Flash, etc. were still fledgling strategies, accounting for far below 20% of total market volume, compared to the current 70% [ref: AITE Group]. As more attention focuses on potential abuse by HFT players and strategies, it is critical to keep in mind that contrary to what proponents may claim repeatedly in various venues, HFT is rife with potential abuse, which in many times likely crosses the threshold of what is considered legal, all at the expense of less sophisticated institutional and, by implication retail, investors. 

Once again: one can hope that the SEC, so focused on substantiating an increase in its "meager" budget, will follow up on such and many other cases, and maybe even preempt them, so that employees don't have to actually come forth first and disclose alleged illegal activities by their market making employers.

The full filing from the Supreme Court Of New York is presented below (and attached)

PS. Has anybody seen Millennium's monthly P&L? One would imagine it may make for a captivating read.


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Comrade de Chaos's picture


scandalous !!! 

Gubbmint Cheese's picture

this HFT thing has more russian names in it than a James Bond movie...


Anonymous's picture

Where's agent Triple-X?

Anonymous's picture

Married to Ringo Starr

m3c's picture

Regulatory capture, textbook example.

good articles; my newest bookmarked finance website ..http://www..
hat tip: finance news & finance opinions

PragmaticIdealist's picture

I made a ZH contribution about the potential for algo abuse on the backs of institutional and retail traders placing limit orders as these are all included in a real-time limit order book that only HFT have the capacity to really utilize. Maybe I was on to something with my stab in the dark so to speak?

Gubbmint Cheese's picture

Nice observation P.I. .. although as per everything else I doubt anything will be done about it..

I need more cowbell's picture

WRONG ATTITUDE ( oops, sorry ) psst...

There is a groundswell gaining momentum, powered by the internet and access to information, that has already led to an Audit the Fed bill; now there is a bill forcing Congress to be on the same health care as everyone else; etc.

While ZH, Denninger, and others are pounding away from their bully pulpits, and growing readership daily, it is we who must ultimately contact our "representatives" and let them know in no uncertain terms they will change direction, do what is right, or lose their jobs.

If I had the expertise, time, and money, i would start a website showing each representaive and senator for each state, so voters could just click on their state, and send these initial demands:

- audit the Fed now; we want to know where every penny went; current status of whre that money is parked or emplyed; payback timeline and criteria, etc. i.e what is the endgame plan?

- All branches of governement will be first in line to be affected by laws they pass, no exceptions. No specail health care plan, no special pension- they must never be exempt from the decisions they make.

- All bills must be posted on a voter viewing website at least 30 days in advance of any vote.

- every Congressperson must read, themselves, every bill they vote on. It's your fucking job, and you serve at our pleasure.

- All branches of governement will have tax audits, evey year; it comes with the territory. You don't like it, tough, find another career.

That enough for now

Anonymous's picture

I would be a daily visitor!!!

Anonymous's picture

well said cowbell.....however it is not enough and you should keep going!

link below shows rep. conyers asking "why would congress read the bills they sign?"


I need more cowbell's picture

OK, going further:

- stop spending immediately on anything new, no matter how much you believe it is "needed". We can't afford it.

- the deficit must be reduced and then eliminated, and then the national debt has to be reduced. We will need a multi-year, multi-decade plan to reduce spending , no matter how painful. Throw out the idiotic present tax code, and implement a flat tax of some sort.

- All spending, all tax law must be structured to minimize any possible further job losses, and actually help small businesses wherever possible.

- we may need to legalize marijuana and tax it. We will need to be very creative to increase new income streams inot the government without killing the economy. It is going to be VERY difficult.

Veteran's picture

-and bring our fucking military back

Anonymous's picture

Renaissance has their hands in everyones pies, this will not end pretty. Ren Tec will be a very different shop in 12 months, if they're still around. Nice work.

ToNYC's picture

Have not they already devolved with the in-house fund making large and the public-tainted one getting squat results?

Miles Kendig's picture

The structure of the curve is self explanatory.

Anonymous's picture

DUDE, as a long time friend of this blog, would you put out a fucking t-shirt that highlights the ZERO HEDGE moniker...

I would buy that you fucking retards.

The random small greek symbol sucks my balls. word.

defender's picture

ummmm, like the one advertized at the top of the page?

Anonymous's picture

Fitch Rates RBSSP Resecuritization Trust 2009-9
Fitch Rates RBSSP Resecuritization Trust 2009-9

Time for our latest remix of The Cure. Any new spices in the recipe?

Re-Resecuritization- say that real fast three time

Zippyin Annapolis's picture

Raises issue for sure-

Anonymous's picture

Tyler, stay away from any "grassy Knoll". How will we learn if something happens to zero hedge? Be careful, I think you are pissing off a lot of powerful people...

Anonymous's picture

With all the info ZH has put to light in mind, I tried watching Fast Money yesterday and just could stand it. It felt like a low budget infomercial.

Anonymous's picture

because that is exactly what it is--a low budget commercial for GE and GE Capital's buck-breaking garbage funds:


contrabandista13's picture

Let's see...  I'm not sure if I've got this right....  Is Ali Baba suing the thieves, or is it the thievs that are suing Ali Baba.....?


Beat ragards,



I need more cowbell's picture


I HATE TO BE THE "CAPS" GUY BUT THIS IS LEGIT- may be worthy of an article, I certainly think so








Sqworl's picture

Ofcourse, let's pay for more votes for the Dictator!  It's so ON...these people have started a revolutuion and my sign reads, Don't underestimate the intelligence of an American!

Anonymous's picture

You may want to be a bit more specific on what it is you're outraged about (which bill? which topic?).

The most controversial thing I found there was that Fleming wants to force Congress members to USE the public healthcare option if one is voted into effect - not an entirely dumb idea, actually.

Anonymous's picture

52852 - if you are unable to find something to be outraged about in this point in time, then you should go back to the flock of sheep at msnbc.

Hephasteus's picture

Wow. All my logical presumptions about the operations of this turned out right. Amazing what a lifetime of mathematics,physics, biology, astrology, philosophy and computer studys will do for your ability to think clearly.

Anonymous's picture

When going into the cybernetic of the trade flows and orders.
Few constraints have to be cleared
The limit order (not a problem)
The order size (becoming closer to a trial and error process as one has to match the size of the pending offer or sell order, otherwise it may disrupt the price chain)
In conclusion not possible to execute these models without a prior information feedback.

Invisible Hand's picture

As a retail investor, I  never had the delusion that the "little guy" had a chance to compete fairly against institutions, hedge funds, and investment houses due to unequal expertise and access to information.  However, it now seems that the house not only has the "0" and "00" to ensure that they come out ahead in the long run but that they have moved on to "biased wheels" to ensure that the house wins virtually all the time.  I am currently totally out of stocks except for day trades.  Once it becomes clear that the game is completely rigged, won't small investors (except for small time crooks) turn their back on the market?  They are going to kill the goose and the SEC will do nothing to prevent it. 

Yossarian's picture

Ha, re:Russian names, my favorite ZeroHedge conspiracy theory (yes, ZH is getting that big now) is that ZH is a Russian-sponsored financial front of the renewed cold war- Putin's effort to undermine the financial hegemony of American oligarchs.  Just my tin-foil theory but I really think ZH is just a bunch of people like myself and the other readers who work in finance and see most of it for the BS that it is...

Miles Kendig's picture

Facts are facts regardless of who speaks them, not to be confused with truths which are whatever the holder chooses to construct.

ToNYC's picture

So you know: retire now from BS and start a real life. Your brain will still work and make something in finance as you say you are making "it" now, and you'll be builing something more real than the tightening spread between FNM/FRE and USTs. Quietly lower a lifeboat off the Titanic before the exploding plastic inevitable.

m3c's picture

A portion of the registration fee is deposited as General Fund revenue, and a portion is made available to appropriators as offsetting collections.

good articles; my newest bookmarked finance website ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

I propose that we set up the SEC as a for profit entity in which proceeds are paid out in the same proportion as the banks. Approximately 50% of profits will be paid out to employees of the SEC with high profile or prolific investigators receiving as much as 20% of the proceeds on a penalty they have secured for the SEC. I have worked for 15 years in prop trading for banks and hedge funds performing index arb, stat arb, and automated algorithmic trading strategies. I have seen the evolution of honest liquidity providing strategies morph into a manipulative science. I would gladly work for the SEC to reveal illegal activity if such a move could enable me to keep the same high level of income that has been afforded to me on the prop trading side. If an SEC researcher can secure a $1mm penalty on hedge fund for insider trading, then that researcher would be paid $150K - $200K as a bonus. Lets get the talent on the side of the SEC and even this game back up. What say you?

Dr Hackenbush's picture

In 2001 online electronic trading was still in its infancy and MIT grads were probably partying at the ease in which they could steal candy from the baby.  Now in its pre-teens, the child’s parents have completely abandoned the child, and “Mom” was last seen as an high priced, albeit high frequency, whore. 

Anonymous's picture

Actually the solution is simple....

Defragment the exchanges for all public securities....

Trading any public security by private means in any form should be banned....

A direct access exchange not to be gamed by market makers or any of the major investment firms by electronic shenanigans....

The publicly traded products should all go through price discovery ona publicly traded direct access electronic system ie the BATS model....

Defragmentation also means ease of regulation....

ie suspicious volume around public announcements could be easily traced and put in check....

Furthermore the exchange should serve more of a utility type function....

Times have changed....

The exchange is really just software that changes the name of the securities owner by time stamp electronically....and should cost very little....ie 20 cents per hundred units....

All orders should be held for no less than one second....

Also there should be no taxes on any public securities of any type....Public securities should be made as efficient as possible in the name of efficient, not expensive capital for innovation....

This is truly a very simple matter....

The money to be made in securities is to be made by management....and everyone should be on a level playing field....

Factual information should be made in wiki based, timely format....

Once the securities transaction highway is thus simplified....may the best management win....

All price discovery of public securities must be discovered on this singular deframented venue....

And actually the SEC has gamed the govt./corp jiob revolving door and has too many internal conflicts to be effective....and thus should be eliminated....and replaced with a new regulator of a simplified public direct access electronic exchange....

Uros Slokar's picture

This is the type of comment that makes me realize that this "mess" will works itself out after the inevitably ugly fall - the problem isn't the free market or capitalism, it's that the free market has been manipulated and contained by those in positions to do so. Solutions like that offered above make me realize that there is a potentially better future once the banksters are gone.

Anonymous's picture

Very much so, but it may be a long time coming yet.

Most of our political and legal systems are "engineered" (hah!) with a mindset stuck in the 1800s, with the occasional reform or revision to somewhat accommodate modern developments.

Computers and networking aren't going anywhere; someday soon they'll be mundane, like pen and ink.

When the big reboot happens the outcome will be worlds better just by applying 21st-century common sense; eg:

1800s mindset: uh, for reasons of transparency city council subcommittees have to keep minutes on file in an office in the basement of city hall, and uh if a citizen wants to see the "minutes" they can visit the office between 9-5, M-F, fill out a form, pay for the cost of making a copy, and get a record in 2-3 business days.

2100s mindset: for reasons of transparency all city council subcommittee meetings are live-broadcast over the internet in 1080p and immediately after the meeting the video is made available on the web in a standard, predictable location. Additionally, voice recognition software is used to make a full, searchable transcription of the meeting in a standard format (with speaker annotation and corresponding video timecodes included); this is also made available immediately after the meeting.

This is probably a long time coming, but so much of the general crappiness of our political systems lies in the fact that the systems were designed with compromises that made sense at the time in light of the era's technological possibilities (and corresponding cost/benefit analyses) but for reasons of easily-predictable institutional dynamics there's not going to be an incentive for a do-over until it all falls apart.

shinola's picture

"All orders should be held no less than one second..."

One second!

Do you suppose that the Big Guys would claim that this puts them at an unfair disadvantage? i.e "We might lose some of our special advantages that we paid for"

jp's picture

Anyone who trades knows the market makers see all of the cards if you want to show them. Options limit that game.

Anonymous's picture

Armstrong.....new highs due to flee public, go private.

Watch out for semantics....free markets manipulated is bullshit..........NO FREE MARKETS except in the minds of feeble fairytale libertarians.

40muleteam borax

Careless Whisper's picture

Some very interesting observations from Judge Ira Gammerman's decision. He's certainly on top of his game and is well known in Manhattan.

First, "trade secrets" aka algos, aren't going to be kept very secret in his court if there's anything illegal going on in that black box. So don't even go there. (page 20, Nexus B)

Second, a Confidentiality Agreement combined with a FORCED Non-Compete Agreement tends to make future employment rather difficult and as the Judge said (quoting from another opinion) "encouage submission to and make difficult departure from an employment where illegal and unethical practices are prevalent." (page 23).


Anonymous's picture

We spend about $2.4T a year on medical care. Someone came up with the idea of an internet site that would be a public clearing house for medical buyers and sellers. The congress, instead, exempted from monopoly laws a private exchange where sellers must pay to play and buyers don't get the true benefit of competition. The public clearing house model was estimated to save us $400B a year. Instead, we just got hosed for $19B to make medical records electronic, more private, more subject to those like RenTec.

A $2.4T annual revenue stream with no outside oversight, there for the taking. Anyone think that opportunity will go to waste?

m3c's picture
m3c (not verified) Aug 30, 2009 12:51 PM

The sound you don't hear is the usual squealing that accompanies any attempt to dip the gummint paw into the honeypot. That's a dead giveaway how very much honey there is.

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

138. On information and belief, Investment Technology Group discovered [REDACTED]. ITG took measures [REDACTED]. Renaissance was forced to abandon its strategy.

Basically, Rentec allegedly exploited a hole in POSIT which was later fixed.

2007 story from Bloomberg "Ex-Simons Employees Say Firm Pursued Illegal Trades"

"New York-based Investment Technology Group took unspecified measures, according to the order, and Renaissance was forced to abandon the strategy, Volfbeyn said. Investment Technology Group spokeswoman Alicia Curran declined to comment."

Careless Whisper's picture

I think it's interesting that this is a CIVIL matter but the issue with the (alleged victim) Goldman Sachs and Sergey Aleynikov is a CRIMINAL matter.

Anonymous's picture

Well, it could be just a matter of time.

1. Rentec exposed itself to a compliance nightmare by running an internal fund (Medallion) alongside $26B RIEF for outsiders. One might need a compliance officer per trader to manage possible conflicts. Think of a mutual fund setting up an internal hedge fund just for friends and family...

2. For couple years after the the POSIT hole had been fixed (presumable in 2003) Medallion returns were anything but spectacular. In 2005 Simons launched RIEF, even spoke to NYT to attract assets. Assets started flowing and they limited them at $2B per month.

3. RIEF is a glorified mutual fund both in fees and performance, barely above the water since inception. ~130bp in fees. Brought estimated $300M to Rentec - at the same time Simons pocketed $6B+ in personal comp.

4. After RIEF launch Medallion returns came back to 60-80% levels.

5. Why do they need RIEF? Why compliance hurdles? Why upset institutional investors with lousy performance?

6. Frontrunning RIEF with Medallion? This seems below Simons. How about using $26B RIEF to game dark pools? To decode their crossing logic? He's a famed code breaker after all... Any other thoughts?