UK Trader Fined 60,000 Pounds For Outsmarting Algos

Tyler Durden's picture

Yet another UK trader is being punished by overzealous regulators for an accomplishment that should instead have earned him accolades: Outsmarting the machines.

In a case that echoes some of the circumstances surrounding the scapegoating of former UK-based trader Nav Sarao, former Bank of America Merrill Lynch bond trader Paul Walter has been fined 60,000 pounds by the FCA for a practice that regulators call ‘algo baiting’.

Algorithm baiting is similar to spoofing – a practice that has been banned by stock-market regulators as those markets have embraced high-frequency trading practices that have broken markets and made them more vulnerable to this type of manipulation. But fixed income markets, like the Dutch loan market Walter is accused of manipulating, have been slower to embrace HFT-type trading. Because of this delay, Walter is a pioneer. Using BrokerTec, a popular fixed-income trading platform, Walter would place a bunch of bids for a given bond, triggering trend-following algos to follow suit. Then he would quickly cancel the bids. Here’s a more complete explanation per the Financial Times. 

Mr Walter entered bids for Dutch state loans that pushed up their price. Then, when other algorithmic trades followed him in response and raised their bids, Mr Walter sold to them and cancelled his quote. This happened 11 times between July and August 2014 while he was working for the bank, the FCA said, while on one occasion he did the opposite. He netted a total of €22,000 profit from this “algo baiting”.

Mark Steward, the head of FCA enforcement, said the FCA would remain “vigilant” in detecting abusive practices like “algo bating”. Of course, programmers could also build better algorithms, stamping out the practice without any help from the government.

“Market manipulation undermines market integrity and confidence. The FCA will be vigilant in detecting abusive practices and will take robust action to protect issuers and participants from all over the world from the harm caused by such abuse.”

Tellingly, Walter did not know that what he was doing was market abuse. But the FCA still found him negligent even though the regulations surrounding these aggressive trading tactics in fixed income markets are not well-defined.

According to the FCA’s register of regulated individuals, Walter became inactive in August 2014 and previously worked at UBS.

Of course, the government’s motivation in fining Walter sets an important precedent that will help regulators in the future. With the ECB tapering its bond purchases (though that’s not the terminology Mario Draghi would use), the centrally-planned markets regime that’s persisted since the crisis is about to unravel. While many Wall Street strategists and PMs remain bullish, regulators see the writing on the wall. They understand the risks that NIRP, market-distorting asset purchases and an increasing reliance on ETFs and high-frequency trading algorithms have created. And when it all comes crashing down – like it did during the May 2010 flash crash – regulators will already have their scapegoat ready.

Years after the crash, authorities arrested Sarao and blamed him for triggering the largest wipeout in market history by placing large orders for S&P 500 e-mini contracts, then cancelling them, to manipulate prices in a way that would benefit his trading positions. Sarao has insisted he did nothing wrong, but that didn’t stop the UK from extraditing him to the US, where he faces serious jail time, as we noted above.

The irony, of course, is hard to miss: Sarao, a small-time trader, is facing prison, while the architects of today’s broken markets receive accolades and are rewarded with lucrative jobs in private equity once they’re done working in government.

And just so we can relive the flash crash in all its horrifying glory, here is an video courtesy of Nanex showing trading in the e-mini future which Sarao has been accused of spoofing.

The punchline: Sarao's orders are shown in red, and they disappear well before the most acute part of the flash crash.


 

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Restorative_Ally's picture

Only governments and central banks are allowed to manipulate markets, all others will be fined/jailed.

MonetaryApostate's picture

Infinity QE is the only thing allowed, they jail any serfs who get rich...

https://plus.google.com/+GaleInnes/posts/CdLuBK4GcMy

spag's picture

the day is coming when it will be illegal to not follow all instructions from a machine

house biscuit's picture

Would explain the squid propaganda about the coming AI Gawd who will rule us

'He who owns the machines makes the rules'

shitshitshit's picture

All of this because artificial intelligence was so smart to begin with.

 

Justin Case's picture

The house always wins, by hook or by crook. They cleaned out the Hunts by rigging the rules to the house advantage. That forced the liquidation of the Hunt's position and the Hunts were smeared as trying to corner the market. They were made the bad guys.

Gap Admirer's picture

"Algo baiting" should not be illegal. It's the algos that are fucked up, not the guy enjoying watching them go spastic (while making a profit).

glenlloyd's picture

I like how (once again) the little guy is being called out for doing something the big shops get away with perpetually. When a machine does it that's fine, when a human does it to trick the machine that's a whole different thing.

jackasses...

To Hell In A Handbasket's picture

Could not have said it any better. Spot on. +1000000

HRClinton's picture

This is but 1 of MANY examples why we need to GO GALT, by joining the Parallel Economy. Your removal of your assets from their economy to the Parallel one, is no different from moving your goods and money from your home country / plantation, and lawfully moving it to another.

Like a parallel (//) universe, the activities in the Parallel Economy avoid the Official Economy. Forever. It's a flight of capital -- your capital. 

Use cash, PM, crypto -- dynamically in any combo -- for exchanging goods and services.

Unless you're telling TPTB that you are indeed their Plantation Property, for them to decree as they will, you decide what to do with your time, energy and assets -- assets that you acquired legally and on which you've already been taxed.

 

Vilfredo Pareto's picture

Amen.

 

Start small.   Every small transaction that is hidden from view by both parties is a victory.

Lanka's picture

The PPT, Fed, and Treasury must maintain their monopoly on market manipulation.  All others, move along.

house biscuit's picture

Just in case there was any doubt that the stock market operates on casino principles

Grandad Grumps's picture

So, it is OK for banks to rig the market and profit hugely from the fraud. But, it is not ok to undo that fraudulent rigging.

mkkby's picture

If you make money -- go to jail. It's okay to lose money, of course.

Just like in vegas. If you start winning, they ask you to leave. Their business is cleaning out suckers, not providing a living/entertainment for smart people.

css1971's picture

You see. The law only applies if you are not IN the club.

TheSilentMajority's picture

Its all rigged.

Steal a $1candy bar and get a criminal record and maybe even some time in jail.

Steal $22k or $22million in the markets and you usually just get a fine or maybe suspension of your trading license.

What a fucked up world we live in.

ted41776's picture

don't cheat, lie, and steal, government doesn't like competition

VoteSmarts's picture

Thanks for the chuckle; there used to be a bumperSnicker of that observation.

peterk's picture

Price  can never be rigged.

This is nonsense as are all these articles on spoofing and what not.

Price is a reflection of Nature.

Many here wont agree.. thats ok.

Vilfredo Pareto's picture

Hahahahaha.

 

You have never read any Nanex articles, not that you would understand them if had lol

jmack's picture

Price is just an advertisement.  It is up to the person putting on the trade to determine where price is in relation to value, and anyone that trades based on the DOM is a fool that needs to be separated from his money.

any_mouse's picture

Yes, punish the human trader for doing what humans can do.

Meanwhile ignore the HFT machines that add no value to the market.

Every human should screw with computer programs. They are only artificially intelligent. Messing with machines is so easy even the e*trade baby or a caveman can do it.

Jasher's picture

12 So speak ye, and so do, as they that shall be judged by the law of liberty.

13 For he shall have judgment without mercy, that hath shewed no mercy; and mercy rejoiceth against judgment.

earleflorida's picture

'sayeth the have-nots as the tide turns coveted hypocrisy unto prophesy'

melpheos's picture

Corruption at it's best.

Algos are manipulating markets day in day out and doing exactly what this trader did on a world scale !!!

They are even front running orders and stealing money from small time investors. Fuck those fuckers

Panic Mode's picture

Erm... he is a trader and never heard of "The house always wins"!!??

Spaced Out's picture

Traders don't play against "the house", they play against other traders and, increasingly, against bots.

GreatUncle's picture

He got hammered for gambling.

This is no different to the house using a marked deck of cards or a fixed roulette wheel to then figure out the fix and play.

Now what is a good buy for an investment again? There ain't none because the market is no longer driven by fundamentals.

100% rigged.

Golden Showers's picture

Oh, well, in the UK there are no rights. No freedom of speech. No Freedom of assembly. Nothing.

This is why in the United States, we don't care too much for monarchy. We think they are fags. Not to insult fags. The Monarchy can answer to that. But they won't.

Matter of fact, if you have a good idea anywhere someone better than you steals it. That's because they are so inbred they can't come up with new ideas and have to punish you for creative thinking. That's why they are better.

It's not that they are better than you, they just have a monopoly on guns and money and telecommunications and press and chums who will lick arse at the push of a button and that fundamentally you have no rights to breath air unless you're permitted to by a gaggle of twats who have no claim to anything and pretend to power. Sort of like Israel.

When you make a country pay taxes in pounds and forbid making farm tools but have to buy them from England people think you are an asshole.

See what happens?

I guess having a brain in the UK is simply illegal unless it's permitted. Not like the UK would know. Nowadays the UK has to ask their betters. Twats.

earleflorida's picture

the Uk is in for a world of 'Hurt'!

and the deutsche`mark is going to be doing ze sterling 'pound' Ding'!?!

do ya feel it...[?]

Eyes Opened's picture

His "crime" ??

He got CAUGHT....

Guentzburgh's picture

FCA conduct is disgracefull and clearly partisan, luckily the algos are brain dead and despite help from govt easy to profit from.

Craven Moorehead's picture

So, just like any casino, if you possess the ability to consistently win at their games, then you are banned from playing 

MrSteve's picture

True, I once closed the roulette table betting and winning on the numbers neighboring 0 and 00.

TommyD88's picture

“algo baiting”

 

lmao..   WTF will they think of next..  Sounds to me they don't like getting beat at their own game..

spanish inquisition's picture

That is what algos do to each other. If he would of written an algo to do the same thing would he be fined? Trick question, yes. He is not in the club.

DontWorry's picture

You can only sit there and let the algos chew you up, not the other way around.

Blue Steel 309's picture

OK can not self govern, because The City of London jews are sovereign AND contol the money supply in the UK. They can not get out from under the heel of the jews without violence. The USA is not quite there yet.

We George Washington a terrorist, or a freedom fighter?

Farqued Up's picture

Ignorance of the law is no excuse!

If some smart ass judge or lawyer states that, simply ask them if they know how many that entails. Then, ask them if in their exalted position if they have a working knowledge of all which number over 3 MILLION!?

Their stupid look won’t gain you much except to embarrass them. Just Us Justice sucks.

King of Ruperts Land's picture

In this case there is not law. Some one caused one of the rich and powerful some trading losses, and needed to be put in his place.

Only the privileged class is allowed to buy low and sell high. The commoners must buy high and sell low or be fined.

Stu Elsample's picture

That pic says it all....The FCA should be fined heavily for keeping the black man down at the janitor level.

Disgruntled Goat's picture

Thats reminds me of a funny story .... my sister in law walked into her office one day and found a black guy going through her purse ... he pushed her down and ran away, but was caught and cornered in the stairwell by about 10 guys that she worked with  ... as the cops were leading him away he was screaming that everyone was just "trying to keep a black man down"

Racer's picture

He did it 11 times in 2 months, yet algos do millions of spoof orders a nano second?

QIG's picture

So, market makers are permitted to establish algoritms that beat the market, but individuals are not allowed to counter this rigging for their own accounts.

"Rigged" markets in favor of the market makers.

Solution, stop trading in any market that is "rigged".  Let that market die.

Gobble D. Goop's picture

We "One Percent" cannot entertain a smart prole. Smart proles are anathema and must be kept in line, lest they taint the bourgeoisie with notions of equality and fairness. God forbid a prole meke enough to join the ranks of the priveleged.  Why, even the smell of a prole is utterly disgusting.  Just imagine! A prole at one of our formals?  Disgusting, the thought of it.  Sheer disgust.