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:

  1. system failure – as happened recently in the US when new software went bizerk for 45 minutes costing the firm $440m.;
  2. 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:

  1. 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



‘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.’


See also: Marxism

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