Australian technology and analysis has been used to crack a case involving traders using high-frequency strategies to manipulate markets in Europe and the UK.

Based on the expert testimony of CMCRC CEO Mike Aitken, in conjunction with technology developed by CMCRC,  the High Court of Justice of England fined three companies and three individuals a total of GBP£7,570,000 (AUD$16,283,714) for using techniques involving order book manipulation, wash trading and layering to manipulate the London Stock Exchange as well as multiple Multilateral Trading Facilities (MTFs).

Mike Aitken, CEO, CMCRC, used the SMARTS system he and colleagues developed in Australia to give evidence of the manipulations. In his judgment Justice Snowden said “Dr Aitken provides the clearest possible evidence that the Traders were engaged in a joint enterprise to manipulate the market.”

SMARTS was used, according to the judgment “to demonstrate the trading in AQP shares on 6 December 2010 on a computer screen. Critically, the analysis offered to (Justice Snowden) was able to show something that would not have been apparent to a market participant at the time, namely the identity of the particular market participant placing the various buy and sell orders. In particular, he was able to identify the orders placed by the Traders.”

Professor Aitken said that the case, in which the UK’s Financial Conduct Authority made an unprecedented request to the High Court to impose penalties instead of doing so itself, was an excellent demonstration of the value that Australian innovation brings to international capital markets.

“This was a landmark case for the UK, clarifying the interpretation of the provisions of European regulations as well as the definitions of market abuse, and technology and intellectual property developed here in Australia was instrumental in achieving this outcome.”

The case centered on trades conducted by Da Vinci Invest Ltd, Da Vinci Invest PTE Ltd, Mineworld Ltd, Mr Szabolcs Banya, Mr Gyorgy Szabolcs Brad and Mr Tamas Pornye in 2010 and 2011. The defendants typically used a mixture of large and small orders entered on one side of the LSE's order book to create a false impression of supply or demand in a particular stock. These orders were never intended to be traded. The large orders were carefully placed at prices close enough to the best bid or offer prevailing on the LSE at the time to give a false impression of supply and demand, but far enough away to minimise the risk that they would be traded. The small share orders (typically around 100 shares) were used to improve the best bid or offer price. As the price improved, further large orders were strategically placed at prices close to the new best bid or offer in order to support the improved price. In this way the defendants systematically sought to manipulate the share price up and down.

These orders had the effect of moving the share price as the market adjusted to the apparent shift in the balance of supply and demand. Once the price had been moved to an advantageous level, the defendants initiated a trade on the other side of the order book in order to profit from the price movement that they had created.  

Professor Aitken said the judgment showed the importance of surveillance in maintaining orderly markets.

“It’s not pointing the finger at HFT per se – LIBOR showed us that manipulation can happen at any speed,” he said. “What’s important is that marketplaces and regulators have the appropriate tools  in place to detect abuses and put a stop to them.”