High-frequency traders get the gravy, investors eat their dust

Wall Streeters on the right side of the ethical tracks are miffed about a paltry fine – with good reason

These days, chefs in posh restaurants don’t call it “gravy”. It’s “sauce”.

But in the Wall Street high-frequency trading firm Athena, they were ladelling out gravy with abandon at the same time every day: two seconds before the 4pm market close.

Confused? You’re supposed to be.

As a detailed “cease and desist” order from New York’s Securities and Exchange Commission (SEC) detailed this week, “gravy” was Athena’s codeword for a strategy to manipulate the close-of-play share prices of thousands of companies, including eBay, on the Nasdaq exchange for high-tech companies.

The way they did this was to use their computerised trading systems to buy or sell (depending on whether they wanted to move the price up or down) massive amounts of shares in the company in the final seconds of the day – so massive that, for those last two seconds, Athena’s deals accounted for more than 70 per cent of the entire world’s trading in those shares, the SEC filing says.

Such a vast amount of trade enabled them to swing the closing price, within reason, to wherever suited their bets – a bit like a bookmaker having a remote-controlled device that powered each horse in the Grand National for the final gallop.

There was no point doing this by halves: the volume of trading on the Nasdaq is so great that you have to really corner the market in order to fix a price.

This need was explained – in that helpful way that traders have of committing their naughty practices to email – by one manager who messaged another: “Make sure we always do our gravy with enough size.”

That exchange appeared to have been some kind of rebuke because Athena had “only” managed to corner 25 per cent of total trading volumes in the targeted shares on that occassion– not enough to move the market. Athena referred to this in another internal email as “owning the game”.

Gravy made Athena serious amounts of money, but as with all market manipulation, it meant that the investors on the other side of their share price bets (pension funds of the likes of you and me, perhaps) probably lost the equivalent amount.

At one stage, the SEC report documents, Nasdaq sent an automated message saying that suspicious orders or quotes potentially intended to manipulate opening or closing prices would be reported to the regulator. An Athena manager passed the message on, telling his colleague to be careful not to push the price too much. As he put it: “Let’s make sure we don’t kill the golden goose.”

The goose was certainly lustrous enough. On one day alone, the email trail reports a trader making “5.3k” – presumably $5,300 – on 33 stocks. “Looks like we have some ... chips … going to Vegas tonight,” a manager replies to the news.

The gravy strategy was scaled up once it had been perfected. In November 2009 it was used in the trading of nearly 13,000 stocks, the SEC says.

The regulator reports that Athena put $40m (£25m) into its gravy, but does not estimate how much profit Athena made from it. However, I’d be willing to bet it was more than the $1m fine it received. In one day alone it lost $2m to $3m when the strategy backfired, so one presumes the average good day looked the reverse of that.

Wall Streeters on the right side of the ethical tracks are miffed about that paltry fine – with good reason. They also complain that the Nasdaq has still not addressed the weaknesses in the way it arranges those last seconds of trade, which experts say hasn’t changed much since 2009, when Athena’s scam was bringing home the Vegas chips.

It seems that, as high-frequency trading gets ever faster, regulators, exchanges and ordinary investors are left eating their dust. And they don’t have any gravy with which to wash it down.

Greece should make an oath: don’t cause market panic

Hippocrates – ancient Greek father of medicine and he of the Hippocratic oath – was a big fan of the concept of resting, particularly after strenuous athletic exercise.

The old philosopher-medic would have been pleased to see the financial markets in his home country pause for breath yesterday after a week that has sent investors’ minds flying back to the days of 2012. Words like “Grexit” have been bandied around again, sending the financial markets into – forgive another ancient Athenian reference – crisis.

For three days straight, Greek shares and bonds have been sold off, adding fuel to the bonfire of investments that dominated a week investors will want to forget.

It was another Greek word – politics – that caused the bulk of the Athens-inspired sell-off. Greece’s Prime Minister, Antonis Samaras, facing ever louder and stronger opposition from the Left, was bounced into declaring that his country would make its exit from its bailout programme early – two years early. The left-wing Syriza party has been declaring that Greece can no longer stand the pain of austerity and is increasingly demanding that the Government cancel some of the country’s debts. Their message has found fertile ground in a nation sick of cuts, cuts, cuts.

But while they may have potentially increased his flagging popularity at home, Mr Samaras’s statements created panic abroad. For, if Greece is to follow Ireland out of its international bailouts, it has to replace those loans on the markets. And currently, the markets are far from willing. They made that loud and clear this week, sending borrowing rates on Greece’s three- year loans, which were 3.5 per cent in July, up to 6.56 per cent.

Had Mr Samaras waited six months or so before making his pronouncements, my guess is that the reaction would have been less negative. Economically, he clearly moved too early.

However, politically, he was left with little choice. Syriza has been growing in strength with its populist demands, and the Prime Minister had to make similar noises.

For, in February, the parliament has to vote for a new president. As his coalition Government stands, it does not have the necessary majority to elect one, meaning he would have to hold a snap general election. One adviser close to the situation last night put that likelihood at 60-40.

Syriza would make a strong showing in such a vote, and it is this prospect that has the markets petrified. While it may promise an end to austerity, economic growth and lashings of milk and honey, in reality, of course, Syriza’s demands for debt haircuts would create market mayhem, drive up Greece’s interest rates and cripple the country even more.

In an effort to shore up Mr Samaras’s stability, the European Union started singing Greece’s praises on Thursday night, while yesterday Mr Samaras said there would be no snap elections. Quite how he can promise that is far from clear.

One thing that’s sure: the current rest will not last. Greece’s race to stability is far from run.