FCA Goes After BAML Trader for Baiting Algorithms into Trading

The UK financial regulator FCA has issued a fine on BAML Trader Paul Walter for.. duping algos into making trades. In a world where high-frequency trading is the norm, human traders apparently may be found guilty of “algo baiting”.

FCA’s fine of £60,000 is imposed for making about €22,000 in profits. The practice has been executed on the Dutch bond market during the summer of 2011. According to the FCA’s charges Walter entered bids into his EBS BrokerTec platform to lure in algos that increased their bids and helped push the price of the bond higher.

After the automatic trend-following algorithms were triggered and followed Walter’s bids, he was swift to execute his trades into the opposite direction and remove the bids from the market. The practice was executed on 11 occasions between July and August of 2014. On one additional occasion, he carried out the same practice on the opposite side of the market.

Mark Steward, Executive Director of Enforcement and Market Oversight, elaborates: “Market manipulation undermines market integrity and confidence. The FCA will be vigilant in detecting abusive practices and will take robust action to protect issuers and participants from all over the world from the harm caused by such abuse.”

Mr Walter stated that he was not aware that the practice he used was abusive according to existing regulations. On its part, the regulator found out that while his market conduct wasn’t intentionally abusive, it was a result of negligence.

Walter essentially masked his true intention to the market when entering the best quotes into his BroketTec bond trading platform. While appearing that he wants to bid, his actual strategy was to sell when prices rose. Skewing the Best Bid price was misleading other market participants to change their pricing too.

As usual, information in markets is everything and the key piece that Mr Walter possessed at the time was that market participants are using algorithms to follow Best Bid and Best Offer orders. What he underestimated was that the other parties have also been monitoring his behavior on the market.

After three occurrences in a single day, on the 18th of July 2011, one of the parties that got its orders executed at a higher than the desired price submitted a complaint made to BrokerTec.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

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