FCA Goes After BAML Trader for Baiting Algorithms into Trading

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

The £60,000 fine has been imposed after Walter made about €22,000 in profit. The fraud was executed on the Dutch bond market during the summer of 2014. According to the FCA, 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 in the opposite direction and remove the bids from the market. This was done 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, said: “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.

Details Behind the Ruling

Walter essentially masked his true intention to the market when entering the best quotes into his BroketTec bond Trading Platform . While appearing that he wanted to bid, his actual strategy was to sell when prices rose. Skewing the Best Bid price misled other market participants into changing 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 use algorithms to follow Best Bid and Best Offer orders. What he underestimated was that the other parties were also monitoring his behavior on the market.

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

Details Behind the Ruling

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