Australian Research Firm Nails Gaming Case of HFT Traders

The case centered on rigged trades conducted by Da Vinci Invest Ltd, Da Vinci Invest PTE Ltd, Mineworld Ltd, and three rogue traders in 2010 and 2011.

A trio of high-frequency traders was convicted of manipulating markets in the UK and in Europe thanks to technology from an Australian research firm and its professor CEO.

The testimony of Australian research firm CMCRC along with the firm’s technology, the High Court of Justice of England fined three companies and three individuals a total of 7,570,000 GBP sterling (US $11,5786,179.53). The charges were using techniques involving order book manipulation, wash trading and layering to manipulate the London Stock Exchange as well as multiple Multilateral Trading Facilities (MTFs).

The case centered on trades conducted by Da Vinci Invest Ltd, Da Vinci Invest PTE Ltd, Mineworld Ltd, Messrs. Szabolcs Banya, Gyorgy Szabolcs Brad and Tamas Pornye in 2010 and 2011.

CMCRC CEO Mike Aitken used the SMARTS system he and colleagues developed in Australia to give evidence of the manipulations. In his judgment Justice Snowden praised the professors testimony, saying Dr. Aitken provides the clearest possible evidence that the Traders were engaged in a joint enterprise to manipulate the market.

The defendants used a mixture of large and small orders entered on one side of the London Stock Exchange’s order book to create a false impression of supply or demand in a particular stock. These orders were never intended to be traded, according to a press statement.

The large orders were carefully placed at prices close enough to the best bid or offer prevailing on the LSE at the time to give a false impression of supply and demand, but far enough away to minimize the risk that they would be traded.The small share orders (typically around 100 shares) were used to improve the best bid or offer price. As the price improved, further large orders were strategically placed at prices close to the new best bid or offer in order to support the improved price.In this way the defendants systematically sought to manipulate the share price up and down, explained the CMCRC statement.

Once the price had been moved to an advantageous level, the defendants initiated a trade on the other side of the order book in order to profit from the price movement that they had created.

According to the judgment, SMARTS was able to demonstrate the trading in AQP shares on 6 December 2010 on a computer screen. Critically, the analysis offered to (Justice Snowden) was able to show something that would not have been apparent to a market participant at the time, namely the identity of the particular market participant placing the various buy and sell orders. In particular, he was able to identify the orders placed by the Traders.

This was a landmark case for the UK, clarifying the interpretation of the provisions of European regulations as well as the definitions of market abuse, and technology and intellectual property developed here in Australia was instrumental in achieving this outcome, said Professor Aitken in a press statement.

Its not pointing the finger at HFT per se – LIBOR showed us that manipulation can happen at any speed, he said. Whats important is that marketplaces and regulators have the appropriate tools inplace to detect abuses and put a stop to them.

TheCMCRCprovides technology for capital and health markets and is funded by the Australian Government, an alliance of University partners and industry partners including regulators, exchanges and market participants across 10 countries.