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Norwegian traders guilty of market manipulation against robot

November 2010 - Corporate & Commercial. Legal Developments by Wikborg Rein.

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Two Norwegian retail traders received suspended sentences on 12 October for imprisonment by Oslo City Court for market manipulation in trades executed against an automated trading system on the Oslo Stock Exchange.

The traders worked out the robot’s trading pattern, pushed prices by executing a series of small transactions against the robot during a short period of time before positions were reversed and profit was taken. The ruling has already attracted international attention and made the front page of the Financial Times yesterday.

Trading pattern of the investors
The retail traders were convicted of market manipulation in relation to around 70 trades they conducted in illiquid stocks on the Oslo Stock Exchange during November 2007 - March 2008. The traders exploited a weakness in the algorithm of counterparty Timber Hill, a European brokerage entity acting as market maker for the US parent company, Interactive Brokers. Observing that this market maker systematically responded in an identical manner to certain specific trading patterns, the traders started off placing one large bid in an illiquid stock at a certain price level. Once matched, the identity of the counterparty to the transaction was disclosed to the traders, and a series of small volume trades were thereafter conducted by the traders in the same stock against the same counterparty at increasing price levels. When prices had reached a certain level the traders reversed their positions and took profit against the market maker. All transactions were executed within very short time spans, typically within a couple of minutes.


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