Traders Convicted For Figuring Out Auto Trading Algorithm; How Is That Illegal?

from the no-whammies dept

Wed, Oct 20th 2010 6:37am — Mike Masnick

Slashdot points us to the story of how two Norwegian day traders have been convicted and given suspended jail sentences for outsmarting an automated computer trading system, enabling them to make money. The details are not entirely clear, but from what's in the article, it sounds like they observed some patterns in the way the system responded to certain trades, and then they took advantage of that. Of course, that's exactly what automated computer trading systems, themselves, are supposed to do. They're supposed to notice patterns in trading and take advantage of that. So, would it have been illegal for the same automated trading system to notice patterns in certain human trades and take advantage of it?

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Filed Under: algorithms, beating the system, norway, trading

56 Comments

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The eejit (profile), 20 Oct 2010 @ 5:54am

Wow. Talk about flawed logic.
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FreemonSandlewould, 20 Oct 2010 @ 6:40am

They must not have had a ruling class elite like Obama in their pocket
Its not your talent....it is who you know.

I would expect this from socialist Norway. What is the USA's excuse?
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telnetdoogie (profile), 20 Oct 2010 @ 7:00am

"human trades" sounds ominous.
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Anonymous Coward, 20 Oct 2010 @ 7:01am

Re: They must not have had a ruling class elite like Obama in their pocket
What is a "ruling class elite" and how does one get them "in their pocket"?
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quickbrownfox, 20 Oct 2010 @ 7:05am

Inside Information
If these two had inside information on the companies whose stock they traded (think Martha Stewart), then their trades would be illegal. Absent that fact, it's hard to see anything inherently unlawful in their transactions. They should definitely appeal their convictions.
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Steve R. (profile), 20 Oct 2010 @ 7:07am

Economic Power Defines the Law
Another indicator that those who have "economic power" seem to be able to direct the legal system for their benefit. The concept of "blind" justice and a "level" playing field are an illusion.
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Anonymous Coward, 20 Oct 2010 @ 7:11am

Re: Re: They must not have had a ruling class elite like Obama in their pocket
"and how does one get them "in their pocket"?"

Campaign contributions.
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Anonymous Coward, 20 Oct 2010 @ 7:13am

Re: They must not have had a ruling class elite like Obama in their pocket
lol, what does Obama have to do with anything here? Silly trolls.
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Dark Helmet (profile), 20 Oct 2010 @ 7:16am

I'm confused...
When you say they were taking advantage of patterns and how certain trades were responded to, is that a form of stock manipulation? And isn't that illegal?

For instance, had they figured out how some automated system responded to a run on a certain stock, and then attempted to cause such a run? Whether auto systems do it or not, I'm pretty sure that's illegal....
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Anonymous Coward, 20 Oct 2010 @ 7:22am

Traders cause runs all the time - they just take turns doing it.
The stock market is a rigged game the independent investor really has no business playing - perhaps save for mutuals and growth stocks like utilities and the like.
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R. Miles (profile), 20 Oct 2010 @ 7:29am

I think the bigger point is being missed.
If these two humans are doing what the program is supposed to be doing, doesn't this mean the application is at fault since the two can beat it and profit?

Something smells like fish and it isn't my cat's breath.
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Dark Helmet (profile), 20 Oct 2010 @ 7:31am

Re: I think the bigger point is being missed.
"Something smells like fish and it isn't my cat's breath."

Must....resist....making disgusting....but funny....sophomoric....comment....
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Anonymous Coward, 20 Oct 2010 @ 7:31am

If they were named goldman or sax they would be hailed as brilliant.
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Anonymous Coward, 20 Oct 2010 @ 7:38am

Flash trading anyone?
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ChimpBush McHitlerBurton, 20 Oct 2010 @ 7:38am

Automated Systems?
The solution to their problem is easy in retrospect. Instead of taking advantage of the patterns that the automated system employs, create an automated system that does this for you. If the first automated system isn't illegal, how can another be?

CBMHB
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Evostick, 20 Oct 2010 @ 7:41am

Re: Flash trading
Correct, although I'm not sure it was flash trading on both sides. I think one side was a computerized market maker and the other was a flash trader.

flash vs flash, fair enough.
flash vs market maker, not fair (apparently).
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MAC, 20 Oct 2010 @ 7:50am

Trading
It's an example of the golden rule; he who has the gold makes the rules...
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The Mighty Buzzard (profile), 20 Oct 2010 @ 7:53am

Re: Re: I think the bigger point is being missed.
No need to make it. We all already thought it.
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ChronoFish (profile), 20 Oct 2010 @ 7:56am

Re: I'm confused...
I would have to agree with you here. It seems to me there is a subtle but important difference between gaming the market and gaming the controls of the market.

Gaming the market is chance with minor influence while gaming the controls is manipulation with minor chance.

-CF
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Overcast (profile), 20 Oct 2010 @ 7:57am

"Oh you figured out that our crapware is badly broken, so we're gonna jail you"
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TtfnJohn (profile), 20 Oct 2010 @ 8:00am

Re: I think the bigger point is being missed.
Actually my cat's breath smells of the rodents she busily clears up from my semi-rural back yard!

That being said what they did was was beat a bot at it's own game as the comments on the story Mike linked to point out.

The conviction appears to be for stock manipulation rather than copying the pattern of the automated computer trading system (bot) and used that to manipulate the price of some stock.

It would logically follow, then, that the bot is just as guilty of stock manipulation but the bot and it's writers/controllers weren't being charged here.

Ideally the stock and commodity markets are about transparency so that the investor can see what they're investing in. These markets are far from ideal with all the derivatives and bots running around which are far from transparent which leaves things ripe for manipulation.

Mike's question holds though in that if it's legal for the bots to manipulate stock values then it must be legal for this pair.

Then again, for small investors, there's a better chance of making money on the lottery than investing in stocks these days given such nonsense as the dot com bubble and the housing bubble that damn near brought down the whole house of cards.
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ChrisB (profile), 20 Oct 2010 @ 8:28am

Re: Inside Information
> think Martha Stewart

WRONG. Martha Stewart was not convicted of insider trading. She was convicted of lying.
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kari, 20 Oct 2010 @ 8:33am

Re: Re: They must not have had a ruling class elite like Obama in their pocket
Where was Obama mentioned? Does his name pop up everytime we hear 'socialist'?

Maybe, just maybe he is one if the two are synonymous when the term is not referring to the USA ...
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Anonymous Coward, 20 Oct 2010 @ 8:34am

http://www.securitiestechnologymonitor.com/news/norwegian-day-traders-arrested-25971-1.html

The two day traders, Svend Egil Larsen and Peder Veiby, have been charged with “market manipulation” and face up to six years in jail if convicted. Timber Hill is a subsidiary of Interactive Brokers and acts as its market maker.

1. The two were not charged with breaking the Auto Trading Algorithm, a computer crime, but were charged with market manipulation.

2. What they did is illegal in the US too. The key phrase here is "market maker". That means what they did is equivalent to manipulating prices on the New York stock exchange which is a private company too.
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Anonymous Coward, 20 Oct 2010 @ 8:37am

Re: Re: Re: They must not have had a ruling class elite like Obama in their pocket
Reading fail! look at your own subject line moron.
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Dark Helmet (profile), 20 Oct 2010 @ 8:44am

Re: Re: Re: Re: They must not have had a ruling class elite like Obama in their pocket
Hell no. Subject lines are tools of the socialist uber-Nazi, Barack Osama BinBama, and are often used for such things as mind control, reality distortion, hiding aliens in areas 51-69, licking puppies, beating pregnant nuns, and giving healthcare to citizens.

I, for one, never read subject lines for fear of all of these evils....
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interval, 20 Oct 2010 @ 8:52am

Re: Re: Inside Information
Right. She lied about using inside knowledge to sell a stock at the right time, which simply prevented her from losing about $40K. The people she lied to were federal investigators, which is where she was convicted. This was and is a woman who had/has a media/consumer crap empire that was worth over $1 Bil. at that time. Can you imagine being so stingy that you grasp on to every penny like that to your own peril?
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Alan Wynne, 20 Oct 2010 @ 9:22am

Market Manipulation
Manipulation the Market to make a profit should be a crime, as it means providing mis-information, that will affect stock values, and then timing your buy's and sales appropriately. This is in effect lying and then stealing from other victims of your lies even if the other victim is a computer "bot". At the end of the day their are people behind the computer "bot" in the from of some kind of investor. Not sure what these guys did but if this is what they did then they deserve the conviction. Another aspect of the issue is where did they get their information on how the automated trading system worked, was it through "inside" or "confidential" information or was it just guess work? If they got it from some form of "confidential source then this is an additional infringement. As far as i know most bots decide on buys and sells from observing market behaviour, making some kind of prediction, and acting on it. They do not provide false information that causes the market to behave in a certain way and then act on that. So although automated trading systems may cause markets to re-act in a certain way everything is re-actionary not pro-actionary (is that even a word). So "bots" do not manipulate the market they re-act to the market.
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Bengie, 20 Oct 2010 @ 9:29am

In other news
Trading based on logic using data that was not illegal to use is somehow illegal.
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Joe, 20 Oct 2010 @ 9:34am

From reading over the article, it seems that what they were doing was in fact illegal. Where there bot was programmed to react to specific market conditions, look for a pattern and execute a trade based on that pattern, it looks like what they were doing was finding out what patterns would cause the bot to react then setting up fake patters in order to trigger the bot's actions in a situation that was manufactured. If they figured out the pattern and used that to follow the bot, i've got no issues. but they were using the bot to create fake market conditions and so they should be stopped.

By the way - this in no way excuses many of the excesses in the trading arena. In my opinion, algorithmic trading will lead to the next big crash.
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isaac the k, 20 Oct 2010 @ 10:02am

Re:
It already has.
Several times.

The different HFT computer systems get stuck in a run loop where one programs actions stimulate the others in to move in the same direction.
We've seen this occur multiple times over the past year.
The thing is, since these are computers and are operating at several times our capacity, the bottom drops out before anyone has time to react and "pull the plug," so to speak.
At a certain point, these systems hit a threshhold and stop trading, which freezes the market. Then people step in, move everyone back into their corners, and press the reset button.

Look in the news - every few months, you have a stock or index that plummets dramatically and then rebounds almost instantaneously. That's the system we have at work.
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harbingerofdoom (profile), 20 Oct 2010 @ 10:23am

Re: Re: Re: Re: Re: They must not have had a ruling class elite like Obama in their pocket
oh sure...
just go on through life with the blinders on sticking your head in the sand and trying to keep on track with the status quo...
ignoring subject lines are nothing more than a fascist plot!

/counterpoint
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Jason, 20 Oct 2010 @ 10:27am

Cheats
Later the two got a new lease on life and were let go to start wreaking havoc all over again. ABBA?
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Dark Helmet (profile), 20 Oct 2010 @ 10:44am

Re: Re: Re: Re: Re: Re: They must not have had a ruling class elite like Obama in their pocket
Look, you pinko commie fuck, everyone knows that subject lines are less efficient than blindy reading comments without them. This trend to try to get people to read the subject lines of comments...I mean, what's next, you know? Today it's "look at your own subject line moron", and tomorrow it's "look at this redistribution of wealth moron".

You know it's true. Mandatory subject line reading is just one less civil liberty we all have. Did you know they require subject line readings in Canada? And guess what? There's so many subject lines, it takes FOREVER to read them. People never even get to the actual comments, they're so busy reading subject lines. Is that what you want in your socialist paradise? Please....

Plus, it's well known that subject line reading is a choice. All this crap about how subject line reading is okay, it's natural, we were born with the proclivity to read subject lines....it's just crap, okay? Reading a subject line is a choice, and I've been informed by my local Catholic priest that reading anything except the bible is against God's will. Reading subject lines is a sin!!!!
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Jesse Jenkins, 20 Oct 2010 @ 11:43am

Auto-trading algorithm
In essence, this is no different than card counting in blackjack. Players observe the progression of events and with additional knowledge, make superior bets. So, is thinking now a crime? I would hope that rationality would be encouraged. We don't see enough of it these days. Might ultimately make the market a safer place, if people behaved less "sheep like".

IMHO
JJ
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vastrightwing, 20 Oct 2010 @ 1:04pm

Re: Market Manipulation
Add flash trading or high frequency trading to market manipulation. This is simply a euphemism for "front-running". So why is "flash trading" or "high frequency trading" ok and front running is illegal? Oh, because they are called different things. That's the only reason I can think of.

And in your post, you actually described "flash trading" pretty well, by the way. It's all about noticing trends and slipping trades in front of the recognized trend. Flash trading can cause stock values to change. It adds friction to trades since by front-running trades, the trades that come after it will go higher.
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Richard (profile), 20 Oct 2010 @ 2:13pm

Re: I'm confused...

For instance, had they figured out how some automated system responded to a run on a certain stock, and then attempted to cause such a run? Whether auto systems do it or not, I'm pretty sure that's illegal....

No the people who implemented the automated trading system should be prosecuted.

The trouble is that these people think that the market is like a casino (their casino) and that if anyone else wins then they must be cheating.
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Richard (profile), 20 Oct 2010 @ 2:26pm

Re: Market Manipulation
As far as i know most bots decide on buys and sells from observing market behaviour, making some kind of prediction, and acting on it. They do not provide false information that causes the market to behave in a certain way and then act on that.

Wrong - the only mechanism they employed was making trades. They did not provide false information in any other form - although the prosecution claimed they gave "false and misleading signs" all they actually did was to make trades.

How can this possibly be illegal - except in the eyes of those who are annoyed that their own stupidity has been exposed?

Did you read the link?
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Richard (profile), 20 Oct 2010 @ 2:36pm

Re:
From reading over the article, it seems that what they were doing was in fact illegal. Where there bot was programmed to react to specific market conditions, look for a pattern and execute a trade based on that pattern, it looks like what they were doing was finding out what patterns would cause the bot to react then setting up fake patters in order to trigger the bot's actions in a situation that was manufactured.
What exactly makes the patterns "fake"? If the bot can't detect what is going on then the responsibility lies with the person who deployed the bot.

This is a sour grapes prosecution.
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abc gum, 20 Oct 2010 @ 4:50pm

Re: They must not have had a ruling class elite like Obama in their pocket
Is that an elite ruling class in your pocket,
or are you just glad to see me.
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Anonymous Coward, 21 Oct 2010 @ 3:29am

Re: Auto-trading algorithm
"In essence, this is no different than card counting in blackjack. Players observe the progression of events and with additional knowledge, make superior bets. So, is thinking now a crime? I would hope that rationality would be encouraged. We don't see enough of it these days. Might ultimately make the market a safer place, if people behaved less "sheep like"."

You're using logic and reason and that's just unnacceptable! If everyone started doing that where would we be?

I think the missing bit is that the stock market is an illusion based on the "sheep-ness" of group psychology anyway. If you don't add the illusion of strict (and perhaps arbitary) rules on it the house of cards collapses. The whole thing is based on an idea... don't go trying to burst the bubble!
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Semi-finance guy, 21 Oct 2010 @ 4:15pm

Why illegal?
It is illegal to deliberately manipulate stock prices. Even though it is "just buying and selling", as it was called above, it would be illegal for a trader, for example, to buy big into a stock just to move the price. The price goes up, and other people buy it because they think that somebody else knows something they don't.

When the price rises high enough, the trader dumps the stock, making a profit and lowering the price. The other buyers are left with a stock which they bought above the current price. In effect, the trader has given false information just by making the stock move, and made money by taking it from other people.

This also destabalises the stock, as well as the market in general (if it happens frequently).

What these two guys did was feed false information to an automated trading system, and they did it deliberately, to make money from the people it was trading on behalf of (that could be a rich fat-cat or it could be your pension fund). If the system was in their own company, then they were possibly also using insider-knowledge and damaging their own company.

Is it harsh to be found guilty of outwitting a machine? I think so, especially as the algorithm clearly sucked if humans figured it out. That's probably why they got off so lightly: suspended sentences and a fine which won't eat too much into their bonuses.
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marak (profile), 21 Oct 2010 @ 4:42pm

So

a) person a created a bot to automaticly trade for them
b) person b noticed the bot was making trades as intended
c) person b setup trades based on that machines trading

isnt person b doing what person a's bot is doing? Trading based off a pre-set of stimuli? Shouldnt the fault lay with the programmer of the bot?

Makes me wonder what the stock market is for, if your not allowed to trade on patterns.
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Anonymous Coward, 22 Oct 2010 @ 5:05pm

Re: They must not have had a ruling class elite like Obama in their pocket
I would expect this from socialist Norway. What is the USA's excuse?

Republicans.
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Anonymous Coward, 22 Oct 2010 @ 5:07pm

Re: Re: Re: Re: Re: They must not have had a ruling class elite like Obama in their pocket
Subject lines are tools of the socialist uber-Nazi, Barack Osama BinBama, and are often used for such things as mind control, reality distortion, hiding aliens in areas 51-69, licking puppies, beating pregnant nuns, and giving healthcare to citizens.

It wasn't sounding so bad until you got to that last one.
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Anonymous Coward, 22 Oct 2010 @ 5:17pm

Re: Re: I think the bigger point is being missed.
It would logically follow, then, that the bot is just as guilty of stock manipulation but the bot and it's writers/controllers weren't being charged here.

What do you want to be that they've got better political connections than the two who were convicted?
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Anonymous Coward, 22 Oct 2010 @ 5:20pm

Re: Automated Systems?
If the first automated system isn't illegal, how can another be?

Do you really have to ask that? You sound like one of those idiots who believe that the law applies equally to everyone.
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Anonymous Coward, 22 Oct 2010 @ 5:23pm

Re: Market Manipulation
Manipulation the Market to make a profit should be a crime, as it means providing mis-information, that will affect stock values, and then timing your buy's and sales appropriately.

Yeah, but they didn't do that.

You fail.
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Anonymous Coward, 22 Oct 2010 @ 7:42pm

It's illegal...
to out-trade the big boys. And let that be a lesson to all.
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bob, 25 Oct 2010 @ 9:25am

More
I bet there is more to this story than simple observation of a system and then using those observations to ones advantage.
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MarkovBlackbox (profile), 13 Oct 2011 @ 2:43pm

Powerful forces manipulate markets for an essential reason
There must be mechanisms to prevent wholescale extraction of profits from price/volume movements. Otherwise, the "transaction tax" would eat up returns. Market makers enforce that tax through the spread however the real makers of markets go further. A battle wages between powerful forces and the outsiders are foder, plain and simple. To prove it, you construct a Markov process (inner blackbox construction of the sinister manipulations between the strong forces). In doing so, you back-test price movements that include inputs from forcing events (constructed or not, war, weather, drought, defaults, perceived corruption). YOu run the simulations back and forward in time forming reverse time probabilities and forward time probabilities within the Mar-model. The difference in temporal probabilities allows you to tell if your model is correct. You may then trade it but beware, they have Markov models too. So, profit then back off. The powerful forces know you better than you do and it's all math and intuition to form the model in the black box. There are many intuitive s among us, the learning program then tunes it. Powerful forces attack you if you use their tools against them.
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MarkovBlackbox (profile), 13 Oct 2011 @ 2:53pm

For example, fiat currencies and gold - Markov intuitions in the blkbox
You may construct a simple model. Goldbugs must die. That is, anyone that attempts to denominate their currency in "hard" assets ( gold, silver, oil, water, productive land etc) must have rick adjusted carrying costs so high that a low rate bond looks attractive. Ok, construct a linear programming model of inequalities with random variables as the coef's. Now feed it a stream of data and compute the distrubutions, variances, covars, and r^2 of each. Now run it forward and back in time. Can you profit or not? Ussually yes, but they are smart, it works very well then crashes and you lose it all and more. Why? they know the direction of price moves on the small time scales. They move profits from one fiat asset to hard asset and use volatility injection to increase the covar (cost of risk). Very clever.
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MarkovBlackbox (profile), 13 Oct 2011 @ 3:09pm

To break their models, you must know their math, motives, and be intuitive.
If you do this, you are a target and you will be hacked. Even a bare metal hyper-visor may do you little good and your simulation data streams may be disrupted and constantly be re-verified. I happened to me, my whole OS was rewritten and my box was wide open. I caught it and went to hyper-visors but who knows if those are even secure. So, my algos went offline and into hardware (XMOS compute arrays) but I have to be careful that my datafeeds don't get modified. My autotrading went to the cloud. This article is exactly correct, you are a target or you work for them. They are all the investment banks and most of the governments that are all invested in fiat currencies, banking, exponential growth "economics", and the stability of markets as they exist.
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MarkovBlackbox (profile), 13 Oct 2011 @ 3:25pm

The market makers behind the market makers can extract any amt but don't
They control the market 100%, this is what my sim models say. The reason they are not detected is that they balance gains and losses by moving market skimming profits sector to sector to gently guide it in the direction that stabilizes the current system (that is quite unstable, see exponential growth implied by an interest rate). Their motives are hidden in the averages atop a huge artificially created volatility. This volatility creates a mask and a cost of ownership that is not generally understood by those not schooled in risk management (which is of course a joke due to the manipulation of risk). This volatility is intelligent and highly correlated with public opinion. Their favorite trick is to flip correlations and violate economic principles for extended periods then correct to the mean quickly.
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MarkovBlackbox (profile), 13 Oct 2011 @ 3:52pm

Re: More
Exactly right, the probabilites of the human reaction given all the events previous and the constructed "events" in the future form a basis for "extrapolation" (crude term) for your reactions when the future event occurs. They know the average reaction of the masses in terms of correlations to all other pertinent asset classes, and your risk aversion (covar between asset classes). The math knows you if the correct underlying black box model from the intuitives is correct and usually one or more tests correct out of a reasonable sample ( and there are always new models to test bounded by compute time).
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MarkovBlackbox (profile), 13 Oct 2011 @ 3:58pm

Guess what?
We have the math now.

We won't be hacked.

We keep moving.

We have the intuitive s.

But the world is so torn apart and unstable, we just profit but why? To be comfortable in a world falling apart? to help others when surely we would be targets when they follow the money from markets to good acts.

The fiat currencies must be maintained at all costs... all instabilities will be delayed and so more people will die.

If however, I profit from my knowledge, what does it matter. I have enough.
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