Based on the testimony of CMCRC chief executive, Mike Aitken, England’s high court last week convicted six defendants and fined them a total of $16,283,714 for using techniques to manipulate order books, wash trading and layering to manipulate the London Stock Exchange as well as other trading facilities. Mike Aitken, who runs the research organisation that provides solutions for capital markets, 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.” He added: “Aitken is an impressive and authoritative expert and his evidence and demonstration using the SMARTS system was illuminating and clear.” New era dawns According to Aitken, this is the start of a new era as increasingly we will see insider trading and other types of manipulation put up on a screen and made available to a court within minutes. This compares to carrying out an exhaustive examination of spread sheets that might eventually arrive at the same conclusion, but take days rather than minutes to get there. SMARTS was used, according to the judgment, to simulate the share trades of the day in question. “Critically, the analysis was able to show Snowden 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,” explained Aitken. “In particular, he was able to identify the orders placed by the traders.” Da Vinci’s way The case centred on trades conducted by joint venture partners associated with Da Vinci Invest in 2010 and 2011. The High Court found that the defendants placed a variety of large and small orders entered on one side of the London Stock Exchange’s order book to create a false impression of supply or demand in a particular stock. This is what’s known as layering; the orders were never intended to be traded. Layering works like this. The large orders were carefully placed at prices close enough to the best bid or offer prevailing on the exchange 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. Tools to end abuse Aitken said the judgment showed the importance of surveillance in maintaining orderly markets. “It’s not pointing the finger at high frequency trading 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.” Regulators on both sides of the Atlantic have come under much pressure to identify and decipher potential market manipulation through computers in recent years, highlighted by the arrest of London-based futures trader, Navinder Singh Sarao in April. US authorities allege Sarao also employed the layering technique which, they claim, contributed to a “flash crash” in US equity markets a few years back. The evidence in the Da Vinci case showed “the same repeated patterns of trading that are too similar and too frequent to be the result of coincidence or some other innocent strategy”, Snowden told the High Court. The court cleared Da Vinci and its management of direct knowledge of or involvement in the manipulative trading conducted by some of its partners. In an unprecedented move, the UK’s Financial Conduct Authority asked the High Court to set and impose penalties instead of doing so itself.