UK Trader Fined 60,000 Pounds For Outsmarting Algos

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.



HRClinton Restorative_Ally Thu, 11/23/2017 - 05:10 Permalink

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. 

In reply to by Restorative_Ally

TheSilentMajority Thu, 11/23/2017 - 04:34 Permalink

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.

peterk Thu, 11/23/2017 - 05:08 Permalink

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.

any_mouse Thu, 11/23/2017 - 05:09 Permalink

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 Thu, 11/23/2017 - 05:12 Permalink

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.

melpheos Thu, 11/23/2017 - 05:16 Permalink

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

GreatUncle Thu, 11/23/2017 - 06:15 Permalink

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 Thu, 11/23/2017 - 06:17 Permalink

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.

Blue Steel 309 Thu, 11/23/2017 - 07:16 Permalink

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 Thu, 11/23/2017 - 07:23 Permalink

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.

Disgruntled Goat Stu Elsample Thu, 11/23/2017 - 11:53 Permalink

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"

In reply to by Stu Elsample

QIG Thu, 11/23/2017 - 08:44 Permalink

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 Thu, 11/23/2017 - 09:12 Permalink

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.