The Happy Davids vs Goliath

The World Happiness Report ranks cities based on how positively citizens evaluate their lives there. Norway had two cities in the top 7 spots (Bergen and Oslo) whereas New York City slots in at number 30 on the list. Today we delve into the story of two Norwegian day traders (neither of whom are named David), who took on Interactive Brokers, a financial services firm founded in New York City in the late 1970s.

Interactive Brokers, formerly known as Timber Hill, had a market cap of around $13B in late 2007 (and today sits around $44B) when it was ransacked and pillaged and robbed blind (sarcasm font needed here) by two independently operating day traders for around $38,000 USD (~400,000 NOK) in late 2007 and into early 2008.

Not only do we have a David vs Goliath in terms of financial strength of opponents but also of public sentiment with the stand alone day trader taking on a big financial institution, the financial system and prosecutors.

Sverre Nilsen - “The case against them was one of the most unpopular I have ever seen in Norway".

Granted, this is not exciting because of the amount of money involved. If high octane sums get your blood pumping, earlier in this series, we looked at the betting exchange example of $600M in liability due to a betting technology glitch and the Knight Trading nightmare that resulted in $460M lost in less than an hour that led to its demise.

Regardless of quantum, this is a fascinating story of the little guy(s) taking on a giant and winning (money) only then to lose (in District Court), but ultimately to emerge victorious (in Supreme Court). A true David vs Goliath story, at least according to traditional folklore but not necessarily through a modern interpretation by Gladwell where he prefers to assert Goliath is actually the underdog given he comes to a slingshot fight with a sword. In any case, before we really veer off course, back to the story.?

Svend Egil Larsen and Peder Veiby were prosecuted for market manipulation and sentenced to imprisonment for 120 and 90 days respectively (suspended sentence) as well as required to pay back certain profits from trading activity. The trading activity under the spotlight, in the case that travelled all the way up to the Supreme Court in Norway, was a flaw in Timber Hill’s automated trading robot it used for market making on the Oslo exchange. The flaw uncovered by both Larsen and Veiby, separate from each other, was best exposed in illiquid stocks. Essentially, both were able to buy shares in certain stocks and then, due to the poorly configured trading robot, drive up the price by buying relatively small amounts of the same stock (and doing the same on the way back down) leaving with a net profit on the trading activity. Here is a simple indicative example of what happened, as best as I can ascertain.

In this example, wide bid ask spreads are used for illustrative purposes (in reality they would be far smaller) but a working automated robot would not allow the spread to move on such small volumes ($100 buy orders). By taking advantage of the robot's penchant to move on low volume, you can see how a trader would be able to accumulate relatively low risk profits (but not entirely risk free).

The presumably happy Norwegians were hauled into court for this activity as it was deemed illegal market manipulation. The prosecution argued that the activity was designed to trigger a price change and not to acquire the shares. It was explained that the trading gave misleading signals to the market and that the market’s price-setting mechanism was disrupted by the trading patterns.

Larsen and Veiby argued that they had not given false or misleading information nor had they used financial muscle to exert power over or manipulate the market. If anything, they argued that the trading activity was beneficial to the market as it exposed an inefficiency that could be rectified and that it was the automated robot that was changing the price, not themselves.

The Supreme Court were not as aligned as the general public. It was split 3-2 but in favor of Larsen and Veiby, the happy people rejoiced!

Judge Webster sided with our Norwegian friends and outlined that although several factors indicated market manipulation, the fact that it was generally accepted market practice, it did not constitute illegal manipulative behavior. What also persuaded Webster was, “that the defendants acted in full transparency.?No incorrect information was given.?The price increase that was obtained was a consequence of the stock robot's programming - which the defendants admittedly made use of, but in full transparency.”

Interestingly, Webster also pointed out an example of activity that may be market manipulation but should not be punishable when debating the topic of generally accepted market practices. This example springs to mind many interesting sports betting analogs, as does this entire case. Here is the example given by Judge Webster:

Another example is that certain investors build up a name for themselves in the market with the consequence that other investors choose to invest in the same company as the person concerned.?In some cases, this is to such an extent that it leads to a price rise in the company.?If the well-regarded investor has already from the start aimed to take advantage of this price rise by selling out of the company again, it can be said that the investor has misled the other investors.?There may be different views on how such behavior should be judged ethically, but provided that the well-regarded investor does not engage in any other form of misleading behavior, it is not appropriate to punish the relationship.?

Many know the power and influence of a limited number of well regarded sports betting pick services on market prices. Anyone with a sports betting odds screen can see college basketball totals swing multiple points in seconds following a release. This is not to suggest sharp services are engaged in manipulation, moreso as a thought exercise and wondering what may happen in parallel situations in other markets such as sports betting that have different rules of engagement and generally accepted practices.

When I think of pick selling (or betting consultants), market manipulation (or market forces) and the ethics underneath it all, I know exactly where to go. Let’s leave that mayhem to X, shall we.?

Finally, Judge Webster addressed automated trading and its application to certain situations, It is not without qualms to impose punitive restrictions on the other investors' opportunities to adapt to a pre-programmed trading pattern. In other words, it seems a get out of jail free card should not be available to poorly programmed automated trading robots by punishing those who take advantage of their mistakes, such as Larsen and Veiby.

When reading the alternative viewpoint from Judge T?nder, I found myself particularly persuaded, even in the face of our happy Scandinavians facing suspended jail terms. But, as it goes, history is written by the victors. Whilst both Judge T?nder and Judge Webster agreed that the definition of market manipulation had been met by the trading activity, they diverged on whether the market manipulation was punishable behavior. One element of T?nder’s review that I found amusing was the assessment of what the defendant’s should have done:

What the defendants have done is not only to uncover a weakness in the robot's program, but to exploit this over time in a series of transactions, until they themselves were exposed.?The appropriate course of action must be to contact the Financial Supervisory Authority both to inform about the weakness, and to possibly clarify whether a continued use of this would be in accordance with accepted market practice, a course of action that the law may seem to require.?

As I read this, I thought about all of the sports betting, horse racing and general betting analogs. Can you imagine asking the ‘exploiters’, whether they be card counters or those betting mis-priced sports markets, to walk up to a regulator or operator/exchange and let them know of the quantifiable/obvious edge that exists to have it taken down/away……that is some level of ethical purity this mere human has not come across, yet.

Ultimately, Larsen and Veiby continued to soak up the aurora borealis free from the shackles of the law and the case raised many ethical, legal and systemic questions. I found it to be sensible that the behavior was left unpunished although I can understand the basis for those dissenting.

This case also reaffirmed that once life and behaviors go beyond the first two standard deviations from the mean, the wide open spaces between edge case and black swan are as copious as ever and each time we see one arise, a fun story ensues.

Caveat Emptor, friends.

Jake Williams is a sports betting and gaming expert who has worked in various roles in the betting industry. Most recently, Jake was the Chief Operating Officer at PointsBet, which was sold to Fanatics for $225M in 2023. Jake is the former host of the Business of Betting Podcast and is currently an advisor and consultant focused on the betting and gaming industry.