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HFT Firm Athena Engaged In Massive Closing Price Manipulation, Called It "Gravy"

Tyler Durden's picture




 

And to think it was only yesterday when the WSJ unleashed this epic puff piece about HFT shop Hudson Trading with the following bullshit:

In their minds, they are making the markets more efficient through their trading... Critics of high-frequency trading are not likely to be easily won over, however. It’s going to take a lot of frank discussions between firms like Hudson River Trading and the market commentators who see them as parasites.

Sadly, what makes it complicated is that they are parasites, the only question if they are law-abiding parasites or criminal parasites. Enter the daily exhibit of yet another HFT firm busted for rigging everything it touches.

Today'culprit: Athena Capital, which did what every other algorithmic, HFT firm does - rig the market of course, but at least it had a sense of humor about it: Athena called the market-rigging algorithm that "manipulated the closing prices of tens of thousands of stocks during the final seconds of almost every trading day during the Relevant Period" by the very amusing name "Gravy." But remember: HFTs are really your friend - they just provide liquidity and stuff.

From the filing:

Athena, an algorithmic, high-frequency trading firm based in New York City, used complex computer programs to carry out a familiar, manipulative scheme: marking the closing price of publicly-traded securities. Through a sophisticated algorithm, Athena manipulated the closing prices of thousands of NASDAQ-listed stocks over a six-month period.

 

Between at least June through December 2009 (the “Relevant Period”), Athena made large purchases or sales of the stocks in the last two seconds before NASDAQ’s 4:00 p.m. close in order to drive the stocks’ closing prices slightly higher or lower. The manipulated closing prices allowed Athena to reap more reliable profits from its otherwise risky strategies. Internally, Athena called the algorithms that traded in the last few seconds “Gravy.”

 

By using high-powered computers, complex algorithms, and rapid-fire trades, Athena manipulated the closing prices of tens of thousands of stocks during the final seconds of almost every trading day during the Relevant Period.

 

Although Athena was a relatively small firm, it dominated the market for these  stocks in the last few seconds. Its trades made up over 70% of the total NASDAQ trading volume of the affected stocks in the seconds before the close of almost every trading day.

 

Athena’s manipulative trading focused on trading in order imbalances in securities at the close of the trading day. Imbalances for the close of trading occur  when there are insufficient on-close orders to match buy and sell orders, i.e., when there are more on-close orders to buy shares than to sell shares (or vice versa), for any given stock.

 

Every day at the close of trading, NASDAQ runs a closing auction to fill all onclose orders at the best price, one that is not too distant from the price of the stock in the continuous book. Leading up to the close, NASDAQ begins releasing information, called Net Order Imbalance Indicator (“Imbalance Message”), concerning the closing auction to help facilitate filling all on-close orders at the best price. At 3:50:00 p.m., NASDAQ issues its first Imbalance Message.

 

Athena’s general strategy for trading based on Imbalance Messages worked as follows: Immediately after the first Imbalance Message, Athena would issue an Imbalance Only on Close order to fill the imbalance. These orders are only filled if there is an imbalance in a security at the close. Athena would then purchase or sell securities on the continuous book on the opposite side of its on-close order, until 3:59:59.99, with the goal of holding no positions (being “flat”) by the close. It called this process “accumulation,” and the algorithms that accumulated these positions were called “accumulators.”

 

Athena was acutely aware of the price impact of some its strategies, particularly its last second trading Gravy strategies. Athena used these strategies and its configurations to give its accumulation an extra push, to help generate profits.

 

For example, in April 2009, an Athena manager (“Manager 1”), after analyzing trading in which Gravy accumulated only approximately 25% of its accumulation, and, thus, had no price impact on the stock, emailed another Athena manager (“Manager 2”) and Athena’s Chief Technology Officer (“CTO”) suggesting that they: “make sure we always do our gravy with enough size.” (emphasis added). In fact, Athena traded nearly 60% of its accumulation in the final 2 seconds of the trading day.

 

With the helping hand of its Gravy strategy, Athena refined a method to manipulate the daily process, known as the “Closing Cross,” that NASDAQ uses to set the closing price of stocks listed on the exchange. Manipulating the closing process can increase market volatility (thereby frustrating the very purpose of the closing auction) and throw off critical metrics linked to the closing price of stocks. A stock’s closing price is the data point most closely scrutinized by investors, securities analysts, and the financial media, and is used to value, and assess management fees on mutual funds, hedge funds, and individual investor portfolios.

 

Athena, however, did not want to push the price of the stocks it traded too much because it created certain trading risks, but also because Athena was concerned about scrutiny from regulators as result of its last second trading. NASDAQ issued an automated Regulatory Alert for “Scrutiny on Expiration and Rebalance Days,” which provided that “Suspicious orders or quotes that are potentially intended to manipulate the opening or closing price will be reported immediately to FINRA.” Athena’s CTO forwarded this alert to Manager 1 and Manager 2 and wrote: “Let’s make sure we don’t kill the golden goose.

Case in point:

Shockingly, market rigging is profitable:

Athena employees knew and expected that Gravy impacted the price of shares it traded, and at times Athena monitored the extent to which it did. For example, in August 2008, Athena employees compiled a spreadsheet containing information on the price movements caused by an early version of Gravy. They titled the spreadsheet “gravy [average] move by symbol[.]” (emphasis added).

 

That same month, an analyst at Athena emailed Manager 2 the day’s overall results and a breakdown of Athena’s profits from Gravy: “PM Gravy made 5.3k, trading on 33 symbols, biggest dollar move NTRS $.12 (.15%), percentage move PCBC $.06 (.41%).” Manager 2, who was out of the office on vacation, responded affirmatively: “Looks like we have some Mach chips….going to Vegas tonight….” (All emphasis added).

The people who bring you gravy: behold the Athena Criminal, pardon, Capital team:

Athena Capital Research is a team of individuals with backgrounds in a variety of fields such as computer science, statistics, mathematics, physics, economics, artificial intelligence, finance and engineering. We seek to combine self-motivated, talented individuals from various disciplines, state-of-the-art technology, and sophisticated trading strategies to produce an optimal work environment. Our people may come from diverse personal and professional backgrounds, but always maintain a “team first” approach when confronted with new market challenges. At Athena, our people are our biggest competitive advantage. We seek out thoughtful, team-oriented individuals who have shown a strong track record of achievement. Athena is always looking for bright, exceptional people who prefer to work in a collegial, yet challenging environment supporting our systematic trading efforts.

Translated: dear criminals, we are hiring!

End result: Athena made millions rigging the market. Which also means the traders on the other side lost millions.

So what is its punishment?

Respondent shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of $1,000,000 to the Securities and Exchange Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.

A $1 million penalty on $10s of million in profits? Where we come from, that's called a Return On Criminal Investment. Which is also why the parasitic HFT industry will never die until the market finally crashes and the entire system is rebuilt from scratch.

Aside from that, remember: the market is, don't laugh, unrigged.

 

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Thu, 10/16/2014 - 14:15 | 5342535 max2205
max2205's picture

Rot in hell fuckers!

I hope I get some of the fines money....yeah right

Thu, 10/16/2014 - 14:31 | 5342615 Kaiser Sousa
Kaiser Sousa's picture

anyone who has ANY debt coupon dollars invested in these completely fraudulent markets is in fact complicit by way of participation...
u mother fuckers want free and fair markets - the first step is TO STEP AWAY FROM THE SOCIOPATHS CASINO...
the second is to abandon the underlying culprit THE FUCKING DEBT COUPON DOLLAR AND SAVE AND INVEST IN REAL FUCKING MONEY...PHYSICAL GOLD AND SILVER...

remain a slave otherwise and dont fucking complain about ur ass fucking at the hands of the MoneyChangers...

Thu, 10/16/2014 - 14:47 | 5342684 centerline
centerline's picture

I don't disagree.  But, pension funds for example need investment returns - big returns in many cases - or they are DOA. 

Risk?  They dont have a choice.

Thu, 10/16/2014 - 14:55 | 5342720 Skateboarder
Skateboarder's picture

Athena was the goddess of wisdom, courage, inspiration, civilization, law and justice, strategic warfare, mathematics, strength, strategy, the arts, crafts, and skill. (from wiki)

Now which of those categories does HFT fall under... strategic warfare?

Thu, 10/16/2014 - 20:02 | 5344415 boogerbently
boogerbently's picture

.....and chocolate !

Thu, 10/16/2014 - 20:40 | 5344558 tc06rtw
tc06rtw's picture

"I don't disagree.  But, pension funds for example need investment returns - big returns in many cases - or they are DOA. 

 

Risk?  They don't have a choice"

. . .  we are all criminals now . . .

Thu, 10/16/2014 - 14:57 | 5342733 linniepar
linniepar's picture

Thu, 10/16/2014 - 15:09 | 5342804 Kaiser Sousa
Kaiser Sousa's picture

in anything there is always choice...
however to often courage is absent...
my significant other thought she had no choice with her pension and at the time lacked the understanding as to the true nature of these fraud markets and debt based paradigm...it was my job to lead her into the light...

she exited in full the casino - penalties and ridicule nothwithstanding, and now understands that real money is not only that but FREEDOM.

always there is choice.

Thu, 10/16/2014 - 15:16 | 5342859 Freddie
Freddie's picture

Send EBOLA people to their trading room and their servers so they can puke and shit all over the place.  Nothing like bloody feces everywhere when you are trying to scalp at the close.

Thu, 10/16/2014 - 14:16 | 5342539 Seasmoke
Seasmoke's picture

Have you never eaten dry meat before. Liquid gravy poured over the dry meat, makes it delicious and eatable. 

Thu, 10/16/2014 - 14:18 | 5342545 youngman
youngman's picture

That is a million dollar fine and several hunded thousand to the politicians campaign fund.....dont forget about that

Thu, 10/16/2014 - 14:31 | 5342617 stocktivity
stocktivity's picture

They'll never pay what they stole from us. Bastards

Thu, 10/16/2014 - 14:18 | 5342549 101 years and c...
101 years and counting's picture

Gravy?  You have Yellen's attention.  That fat pig loves gravy.

Thu, 10/16/2014 - 14:18 | 5342554 Colonel Klink
Colonel Klink's picture

SEC is one of the greatest fucking jokes on the American regulatory system, just slightly above every other alphabet government agency.

Thu, 10/16/2014 - 14:22 | 5342557 NMFP
Thu, 10/16/2014 - 14:21 | 5342562 Kaiser Sousa
Kaiser Sousa's picture

told ya...
RIGGED.

as if the last 2 days of reversals didnt convince ya...
DEATH TO THE MONEYCHANGERS.

Thu, 10/16/2014 - 14:20 | 5342564 madbraz
madbraz's picture

But isn't that what the NY FED every minute of the day?

Thu, 10/16/2014 - 14:22 | 5342573 ebworthen
ebworthen's picture

"Gravy" courtesy of:  the taxpayer, the FED (via future generations) and a somnolent SEC.

Jail somebody already, or just come out and say you are owned by the banks.

Thu, 10/16/2014 - 14:25 | 5342592 Bell's 2 hearted
Bell's 2 hearted's picture

HFTs are "people" too ... just not for corporations ...

Thu, 10/16/2014 - 14:23 | 5342574 SirTaxedAlot
SirTaxedAlot's picture

So this morning you post an article about there being no e-mini liquidity and now you bash HFT for providing liquidity. Which is it ZH?

Thu, 10/16/2014 - 14:25 | 5342586 ebworthen
ebworthen's picture

Apples and Oranges both have Vitamin C but are different.

Or did you forget the /sarc tag?

Thu, 10/16/2014 - 14:22 | 5342576 Bell's 2 hearted
Bell's 2 hearted's picture

"A $1 million penalty on $10s of million in profits? Where we come from, that's called a Return On Criminal Investment."

 

reminds me of the movie Clear and Present Danger ... where the drug lord makes a deal with the NSA honcho to "allow" 10% percent of drug shipments to get pinched ... therefore, both could claim victory 

Thu, 10/16/2014 - 14:25 | 5342579 Bangalore Equit...
Bangalore Equity Trader's picture

Listen.

I hear this quote quite often from Americans.

“Let’s make sure we don’t kill the golden goose.”

True irony.

Thu, 10/16/2014 - 14:23 | 5342583 tumblemore
tumblemore's picture

it'll take a long time to sink in cos it's a difficult thing to accept and it'll probably be too late when it does but

 

Wall St. = organised crime

Thu, 10/16/2014 - 14:24 | 5342584 SharkBit
SharkBit's picture

Just the tip of the Iceberg.  Every HFT, every big bank, every Dark Pool has all kinds of strategies to game the market each and every nanosecond of each and every trading day.  Shame, shame, shame on all this manipulation.  Go trade with Brad and IEX and leave these HFT fuckers to crash and burn.

Thu, 10/16/2014 - 14:24 | 5342585 Ariadne
Thu, 10/16/2014 - 14:25 | 5342588 saints51
saints51's picture

Athena meet Dewalt nail gun.

Thu, 10/16/2014 - 14:24 | 5342589 BabylonDeer
BabylonDeer's picture

Rigged? Common, every trader had a couple of thousands trading this way in the old "slow" days. MOC's/Imballance trading was a really sweet method back in the days :)

Thu, 10/16/2014 - 14:27 | 5342599 Quinvarius
Quinvarius's picture

I suspect the sell algos are going to tear into this market at 3 or 3:30pm again today.  Someone else's thicker gravy.

Thu, 10/16/2014 - 14:27 | 5342601 Tachyon5321
Tachyon5321's picture

 

 

 

Some how BATS is always involved in this sh@t....

Thu, 10/16/2014 - 14:32 | 5342621 Never One Roach
Never One Roach's picture

Gee, why does everyone immediately think of Rampant Fraud now when they think of Wall Street or stawks?

Thu, 10/16/2014 - 14:31 | 5342622 Bosch
Bosch's picture

Ironically a parasitic existence is what they will soon have in prison, suck off everyone or die. 

 

 

Thu, 10/16/2014 - 14:32 | 5342625 ekm1
ekm1's picture

That is why world is abandoning the system.

 

Thu, 10/16/2014 - 14:36 | 5342639 One eyed man
One eyed man's picture

HFT is not designed to supply liquidity. It is intended to extract it. From us!

Goldman is a vampire while the HFT bots are like swarms of mosquitos.

Thu, 10/16/2014 - 14:37 | 5342647 Eternal Complainer
Eternal Complainer's picture

$1million penalty is the regulator's cut

Thu, 10/16/2014 - 14:38 | 5342652 William.M.Tweed
William.M.Tweed's picture

Manager 1 and Manager 2 are probably reading this article and laughing

 

 

The appearance of the law must be upheld, Especially when it's being broken

Thu, 10/16/2014 - 14:50 | 5342699 buzzsaw99
buzzsaw99's picture

They make their own. [/Mr. Monk]

Thu, 10/16/2014 - 15:02 | 5342753 fibonacci's claus
fibonacci's claus's picture

thats uncle sam's "baby gravy."  janet yellen queefs out the qe and bitcoin and helps slurp up uncle sams baby gravy

Thu, 10/16/2014 - 15:33 | 5342969 RaceToTheBottom
RaceToTheBottom's picture

The person whose emails led to this deal with the company is probably known to the firm and will probably be blacklisted in the industry.

No matter if he/she got some scratch for committing career suicide, they will not find work again in that field.  I am wondering whether they feel it was worthwhile?

 

Thu, 10/16/2014 - 15:55 | 5343109 madcows
madcows's picture

what did you think it would be called, Sanctification?  they're doing God's work, right.  i suppose it depends on what god you worhip.  Baal, Molech, satan?

Thu, 10/16/2014 - 17:04 | 5343537 theyjustcantstop
theyjustcantstop's picture

this will be a sight to witness when federal, state, local. public-sector, and private sector union workers go to retire, and ther's no retirement money.

then they read how these hft employees were taking great pleasure in robbing their retirement funds.

 

Thu, 10/16/2014 - 17:48 | 5343767 TacticalTrading
TacticalTrading's picture

If there a "you are not allowed to front run the market on close order imbalance announcements" rule I am not aware of, then never mind.

 

Ok, so let me get this straight.

At 3:50 NASDAQ starts announcing 'Hey, come front run these big orders' which by the way will ONLY be filled at exactly 4:00 PM.

Then, Someone decides to Front Run the NASDAQ announced orders, agressively driving prices in their favor. Then, the front runners of the NASDAQ announced Orders unloads the entire front run "accumulation" at exactly 4:00 PM. They make money and everyone gets pissed. 

Remember how bad it was when spreads were 1/8, and you could hide a 1/16 for yourself...

 

 

 

Thu, 10/16/2014 - 20:09 | 5344451 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

so if HFT goes away can we all go back to scalping on the 5M charts??

 

swing trading works for me!

 

~Dipshitmiddleclasswhitekid

Thu, 10/16/2014 - 22:18 | 5344858 Downtoolong
Downtoolong's picture

Athena was probably fingered by Goldman for getting too close to their Gravy Train.

FINRA is probably seriously considering issuing a statement endorsing the findings and $1M fine, but, only if and after Athena loses their third appeal.

Another token minnow is sacrificed to demonstrate it's safe to get back in the water.

It's all one big circus act.  The clowns are in all three rings now.


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