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Norwegian Day Traders Cleared of Wrongdoing
Two Norwegian day traders who outwitted the automated trading system of a big US broker have been cleared of all wrongdoing by the country’s highest court.
The two men were handed suspended prison sentences for market manipulation in 2010 after they worked out how the computerised system would react to certain trading patterns — allowing them to influence the price of low-volume stocks.
Their appeal against that ruling was upheld by the Norwegian Supreme Court on Wednesday, which cleared them of market manipulation. The verdict will please the trading community in Norway, which had come to view the duo as Robin Hood figures, beating the big financial houses at their own game.
Two expert witnesses testified that the activities of Svend Egil Larsen and Peder Veiby were common market practice. The defendants also argued that they were making the market more efficient by exploiting a flawed system.
Mr Larsen told the Financial Times that he was still getting the better of algorithmic trading systems today. “Just the other month UBS forgot to set a bottom limit on one of their algos and I got some stocks for cheap,” he said. “They even called me afterwards and asked me to reverse the trade!” He declined to do so.
The case involved Timber Hill, a unit of US-based Interactive Brokers. Prosecutors had argued that Mr Larsen and Mr Veiby “gave false and misleading signals about supply, demand, and prices” by manipulating several Norwegian stocks through Timber Hill’s online trading platform.
But Mr Larsen said that the system was so flawed that “any rational investor could have done what we did in the same open and transparent way.” The court said that the transparency of their trades was one reason for their acquittal.
Before the ruling both Mr Larsen and Mr Veiby had already been found innocent in the court of public opinion. “The case against them was one of the most unpopular I have ever seen in Norway,” said Sverre Nilsen, a reporter at local financial paper E24, who was following the trial.
Mr Nilsen said that this partly reflects the unpopularity of algorithmic trading systems that some feel gives big financial houses an unfair advantage, but also the charisma of Mr Larsen, in particular, who was able to come across as a lovable rogue taking on the powers that be.
Mr Veiby and Mr Larsen placed thousands of trades from late 2007 to early 2008. Mr Larsen said that problems arose when he was “bored in Florida” waiting for his wife and children to wake up and so placed a number of larger trades that ended up attracting attention.
The eventual court case in 2010 came soon after the so-called “flash crash” in May of that year, when a single algorithm triggered a plunge in US stocks prompting growing scrutiny of automated trading systems.
Mr Larsen’s lawyer, Halldor Tjoflaat, said he was pleased with the verdict but disappointed that the court did not use it as an opportunity to clarify the guidelines for the Securities Trading Act on market manipulation.