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Into
my mail box on 16 August came a warning from the police and regulatory
authorities that ‘Organised criminal groups are targeting the savings of
Australian investment funds.’ They use ‘sophisticated websites’. These crooks
cold-call on your phone or at your door. They want your ready money.
Grateful
though we should be for this advice, I had been alerted to far more
sophisticated gangs by an article on the back page of the Financial Review two days earlier. (14 August 2012). The newspaper
summarised a report from the Australian Securities and Investment Commission
(ASIC) under headline: ‘ASIC confronts a trading monster’
The
ASIC report pointed to breaches of ‘market integrity rules’ by algorithmic
trading systems.’ [ALGO is short for algorithm.]
An
Algorithmic programme is a series of
instructions to solve a problem by set steps.
Algorithmic is contrasted with heuristic where you try to solve
problems by trial and error. After each step, the programme adjusts to learn
from its successes and mistakes.
ALGOs
were supposed to control trades while solving the problem of what and when to
buy or sell.
To
be clear about the threats identified by ASIC, we need to distinguish three of
the ways in which computerised trades can go wrong:
- system failure – as happened
recently in the US when new software went bizerk for 45 minutes costing the
firm $440m.;
- too clever by half when a trading
program develops a life of its own, as happened in 1998 when two Nobel
Prize winners almost laid waste to the entire financial system. No
malfeasance was involved – just hubris.
The
issues raised by ASIC are not these technical ones. On the contrary, the danger
comes from deliberate fraud:
- Manipulation, that is, corporate
behaviour that should be a crime. Here is the ‘monster’ in the ASIC case.
Inside the monster are corporate crooks. The danger is not from heavies coming
door to door to strong-arm pensioners into electricity contracts. The
threat is from smooth-a-silk stockbrokers.
The
victims are likely to be all of us, collectively as much as individually, since
the funds that are open to manipulation include superannuation. Even those of
us with no super or savings suffer when the financial system blows. Greek
pensioners know all about that.
Yhe
sophisticated computer games through which these crimes are conducted are built
on the following moves: front-running; HFT; ALGOs; Dark pools; wash trades; and
a kill switch.
No,
these terms are not from a computer game. They are the jargon of the
‘sophisticated websit es’ being used by the posh ‘criminal groups’. They are
not the ones that the letter-drop warned
against.
HFT
High Frequency Trading
‘lodged
thousands of orders to squeeze out a profit from the narrowing of the bid and
offer price of shares.’
Shaving from HFT (High Frequency Trading)
Last
financial year, the ASX handled $1.185 trillion in trades
(That
was down over 10 percent from 2010-11, so there is an immediate reason for why
brokers want to manipulate the system to increase the number of trades and
hence their incomes.)
That
is, $1,185,000,000,000.
Now,
suppose that a trader charges as little as one cent in every hundred dollars
worth of stock traded, or one cent in every 10,000. That adds up to $118.5m. a
year in earnings from the $1.185 tillion..
The
profit will be somewhat less, perhaps no more than $100m..
If
they charge one cent in every $10, the earnings rocket up to a cool billion.
On
top of the share market, there is the money market and the foreign exchange
market.
So
throw in a couple of more hundred millions for what used to require the skill
of shuffling papers but now is done by those ‘sophisticated computers’.
ALGO trading systems can be far ‘more insidious’
than HFTs
Define???
Front-running
‘One
of the oldest manipulation games in the markets … both here and overseas.’
‘The
banks used to position their books ahead of putting through orders for their
clients. They made a profit on the way through.’
Ø buying and selling
simultaneously is ‘a concoction’ which makes ‘a mockery’ of the orderly market
but makes ‘money on the churn’.
‘layering’
ie ‘false orders to seduce
trades from the big fund managers.’
‘dark
trading venues’ aka ‘dark pools’
called dark because no information about them is publicly
available.
The ASX has a dark
pool named Centrepoint which is licensed to operate HFT.
The article claims that the
tide of so-called market sentiment is turning against them
‘wash trades’ are when ‘both sides of the trade are on
behalf of the same account.’. They are designed to lift the price and then sell
at a profit.
ASIC
says that a crackdown on them is coming soon. To which we are entitled ask: why
did that not happen years ago?
ASIC’s
reputation is one of failure to pursue prosecutions or to win the cases it does
take to court. Beyond any internal weaknesses in its procedures and staff, the
odds are stacked against the regulator. First, there are limits on how much it
can do to stop the naïve or the greedy from giving their money to crooks.
Secondly, the laws are like Swiss cheese with so many gaps that even a pretty
ordinary trader can find a way through the net of “Don’ts”. However, the core
problem is with the legal system and the culture of bourgeois jurisprudence.
The profession is dominated by the commercial and corporate firms, each of
which is now a global conglomerate. They supply the
judges. Legal education, post-university training and in-house experience
indoctrinates practitioners with presumptions of innocence about capitalism in
all its doings. Hence, the majestic impartiality of The Law makes it almost
impossible to get a conviction.
One case from Alan Bond in 1991 has just been settled.
Juries find it difficult to follow months of evidence about financial instruments.
Compared with the theft of a physical object.
‘Disclosure’ as a way to conceal what went on by drowning
the opposite legal team and the judge in millions of pages of evidence.
An
alternative to shredding the files as one Melbourne firm did on behalf of a
tobacco firm.
ASIC
says that a kill switch is needed ‘to
prevent systematic damage to the market’.
And that filters are needed to prevent market
manipulations.
The traders claim it is too costly to install filters and
controls. Too costly to whom? To the manipulators who gain from the lack of
control? or too costly for the workers whose life- savings are up for grabs through
damage to the super funds?
Splits
are opening within the financial sector with fund managers complaining and
demanding answers from brokerage firms.
Fade out
When
the baddies attack Wall Street in The Dark
Knight Rises, one broker tries to put the raiders off by saying ‘There’s no
money here’. To which the head nastie replies: ‘Then what are you doing here?’
Or
as US author, William Burroughs, put it:
‘They
don’t want your money. They want all
your money.’
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