Spoof Wars continues.

The Financial Services Authority (FSA) has obtained an interim High Court injunction preventing a number of companies and individuals from manipulating the market in UK-listed shares. The injunction also freezes the assets of the companies.

The companies in question are Da Vinci Invest PTE and Mineworld Ltd, along with three traders based in “Switzerland and/or Hungary” whom the FSA says traded on behalf of those companies.

The FSA believes that these companies and individuals have committed market abuse by engaging in a form of manipulative trading known as “layering”, which created a misleading impression asto the supply and demand of shares. The companies and individuals traded across a number of UK trading platforms and the FSA estimates that they made over £1 million gross profit from this activity.

“Layering,” the bastard cousin of High-Frequency Trading, is to spoof a security’s order book with fake bids one way with the aim of improving the price for a trade the other way. Much like HFT, it requires direct market access and benefits from a nippy data connection.

Da Vinci Invest had both these things because it ran HFT event-driven algorithmic funds. Here’s its investment strategy (and, yes, the website does call it “The Da Vinci Invest Code”).

* Ultra low latency setup via co-located direct exchange access, cutting edge strategies code and news feed.

* Aims to be the first party to trade at the most favorable prices as soon as there is a discrepancy between the consensus expectation and the actual news data.

* Adjusts volume and profit targets in proportion to the magnitude of the deviation from the consensus expectation and the range of published estimates.

* Stop loss always tighter than the ideal profit targets; therefore the setup is to capture breakouts on surprise news, doesn’t send orders if the actual numbers are too close to the consensus view.

The Swiss-based, UK-registered asset manager’s Strategies UI Fund has $3.1m under management, according to its website. And — at least for a few years — the strategy seemed to work. Here’s a performance chart taken from the most recent investor newsletter.

The FSA alleges the spoofing took place between August 2010 to July 2011 and won a court order to freeze the company’s assets on July 12.

When that happened, Da Vinci put forward a rogue-trader defence. Here’s what Hendrik Klein, Da Vinci’s chief executive officer, told Bloomberg in July.

“We funded some Hungarian traders who traded on the London stock exchange and the FSA has the opinion that they broke some rules. … We controlled their risk but we didn’t know exactly how they traded.”

And here’s what Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said on Thursday:

“This injunction shows that the FSA will take swift and decisive action to protect the integrity of UK markets, wherever those seeking to abuse them are based. These companies engaged in repeated cross-platform market manipulation, which the FSA will not tolerate.”

Both the FSA’s investigation and the associated court case continue.

Related link:
No leaks, just algo trading – FT Alphaville

This entry was posted by Bryce Elder on Thursday, September 1st, 2011 at 12:25 and is filed under Capital markets. Tagged with Algorithims, fsa, High frequency trading. Edit this entry.