http://econotwist.wordpress.com/2010/09/29/in-defence-of-a-robot/ It is totally insane. Two Norwegian traders were taken to court because the figured out how a robot works and evetually made money. Their placement of trades against the robot was called manipulation.
i lost a lot of respect for ib/timber hil for pressuring the ose to go after these guys. their bot was inefficient, and those traders removed the inefficiency. that's how a properly functioning market should work. charging those traders with manipulation for exploiting a poorly written algorithm is anti-free market and anti-capitalist and is the only thing about this case that's manipulative. peterffy is a huge hypocrite if he allows them to be charged and prosecuted without making a statement taking some responsibility. it's cutthroat capitalism when he's at the wheel, but when he gets out-competed he lets a strong armed socialist gov do his dirty work... very weak.
I am having a hard time deciding where I stand on this. On the one hand, if you enter a computer program into a market with the specific intent to get the best price possible, then if someone is able to exploit a pattern in your software you need to take responsibility for that bot. ALL programs are by definition succeptable to this kind of attack. Analogously, that is why random number generator inside a computer are not secure - the "random numbers" are generated by algorithms! On the other hand, the securities rules are very specific on this issue. As far as I know, you must have an economic reason for entering an order into a matching engine, and the lowest common denominator here is arbitrage, which __is__ economic. Entering orders simply to cause prices to fluctuate on programming "errors" is not economic, and is therefore manipulation. It is the electronic version of "starting a rumor." I am 95% certain I would have exploited the same inneficiency, but in retrospect would have felt wrong doing it. It is not in the spirit of what markets are about. FWIW, I have heard of other suits with Timber Hill, and they seem to hate when anyone arbs them, legally or otherwise.
I'm surprised that Timber Hill would publicly admit that their market making agent was fooled by this. A team won the 2004 Penn-Lehman Automated Trading Project doing very close to the same thing: http://www.cis.upenn.edu/~mkearns/projects/newsandnotes04.html
Perhaps, the monetary benefit (in the case of winning a compensation) outweighs the reputational hazzard. An added beenfit (which is particularly difficult to quantify) from winning the case is it will create a precedent that will strongly discourage people from trading against algos defficiencies in the future.
from this article, you can see, there are no merit for the lawsuit, robot was designed with flaws. traders just took advantage of inefficiency in the market. Never let machine to do a human's job, computer has hard time to value anything in free market on itself.
They whine when they are caught at their own game... Pathetic. I would understand an unsophisticated long term investor to intent a trial against a manipulating boat, but not the contrary...
Personnally I have even an harder time understanding what they did wrong !? I don't see anything wrong ??!!?? They bought a block, then smaller lots and boom the suckers raise what ? Isn't it supply&demand ?
Timber Hill = IB ? Unless I missed this, how exactly was all of this figured out in the first place? And how exactly is any of this different than what happens every ms with all electronically traded futures contracts in the USA / globally?
To save google time: http://www.interactivebrokers.com/en/general/about/mediaRelations/12-15-04.php?ib_entity=llc it says: "IB's market-making affiliate Timber Hill"