You know, it's probably just as well that no one ever did a discounted cash flow forecast on the Apollo programme. We'd never have gone to the moon.

> There were fights in supermarkets in Gloucestershire over bread and water when the floods hit in 2007...

Let's be fair, they don't really need an excuse to fight in Gloucestershire.

The same thing will happen to the Facebook social networking service as happened to the Compuserve electronic mail service. New, open protocols and standards will negate the network effects it currently enjoys, and it will become one of many inter-operative social networking platforms.

There is certainly a sound basis for the assertion that "more liquidity is better for investors" because it delivers tighter spreads and greater market depth.

However.....I'm not necessarily convinced that the sort of liquidity provided by high-frequency traders is of a particularly high "quality", for want of a better description. I think it's worth taking a step back and looking at the whole picture. Are these guys making their money by honest trading or are they exploiting flaws in the way the system is put together and regulated? I've never traded in the US so I don't know a lot about it but I find myself wondering about Reg NMS. When I got into a shop to buy an iPad, they're under no obligation to let me know that the shop around the corner is selling it for 10% less. And your average retail investor doesn't know or care whether the shares they're buying/selling through their broker are traded on NYSE, NASDAQ or some dark pool. The important thing should be that they get the best price available. I probably don't know enough about it so I'm probably just talking out of my arse at this point. I should probably just shut up and hit submit. Yup.

Well, that actually makes more sense than TMB deciding to air their stupidity in public. :-)

> Can someone tell me why what they did was illegal? i.e. What are the limits?

Put simply, they took the piss. Personally, I think they got off quite lightly because, if I recall correctly, the FSA's investigation revealed that they had planned to "drive up" the futures market which, to me, is almost a dictionary definition of market manipulation.

It's like the difference between saying "I reckon the price of silver is going to go up, so I'm going to buy some silver so I can sell it later at a profit" and saying "Hey, let's buy up all the silver in the world so we can corner the market and make a killing!"

Everyone with half a brain knew that what they had done was possible but our guys had rejected the idea without giving it any serious consideration because they knew it was deeply, deeply dodgy (in a bad way, that is) from a legal perspective.

> I have, however, found a bug in one of your algorithms. Lathering after rinsing doesn't work so well.

Fuck! That explains why my hair is so manky!

Haha, I'll bet they're embarrassed! :-)

Well, in an ideal world, you profit from the spread - e.g. you buy at 99.99 and sell at 100.01, thereby making a profit of $0.02 on each share. That's what happens in liquid markets, where there are plenty of buyers and sellers putting in market orders.

It's not really all that different to what Asda does with cans of beans - buy 'em from one person and sell 'em to another for a higher price.

There are "official" market makers on the NYSE and (I think still) on the London Stock Exchange.

I'm not a lawyer and I don't speak Norwegian so I can't read the court document to find out exactly what happened. I am, however, an electronic trading specialist and I've also been a trader at a big American investment bank (one that didn't go bust, by the way, despite my best efforts).

Rumour has it that these guys realised that there was a flawed algorithm (which turns out to have been operated by Timber Hill) making a market in illiquid shares, which set its quotes based either on the prices at which recent trades in those shares had been done, or on the algorithm's own position in the stock.

To give some background: if you are making a market in a stock, that means you are prepared to buy from people who want to sell and sell to people who want to buy. Unless you're feeling particularly generous, you want to buy at a "low" price and sell at a "high" price. In liquid markets (i.e. where there are lots of people buying and selling), you can typically rely on the market mid price (i.e. the best bid plus the best offer, divided by two) and "spread" off that (e.g. add a cent to it to get your ask, subtract a cent from it to get your bid). As the market (i.e. the mid price) moves up and down, you can adjust your bid/ask to follow it and, if you end up buying or selling stock, you can adjust your bid/ask to make it more likely that your quotes get hit/lifted to flatten out your position (e.g. if someone hit your bid and sold you shares, you would probably lower both your bid and your offer, in relation to the market, to make it more likely that someone will buy the shares off you and less likely that you'll buy more shares).

However, in illiquid markets and, in particular, in markets where you are the only market-maker, you may not be able to rely on a market mid, because you are the market, so it's up to you to set the price.

So, let's say you start off with a quote of 99.99/100.01 and a quantity of 10,000 on each side. I come in and lift your ask (i.e. I submit an order to buy at 100.01, which matches against your ask) to the tune of 1,000 shares (i.e. I buy 1,000 shares from you). You are now "short" 1,000 shares, so you might adjust your price to make your bid more attractive to potential sellers - i.e. you change your quote to 100.00/100.02 - and you keep quoting with a 10,000 quantity on either side.

I buy another 1000 shares from you. You shift your quote to 100.01/100.03

I buy another 1000 shares from you. You shift your quote to 100.02/100.04

I buy another 1000 shares from you. You shift your quote to 100.03/100.05

I now own a total of 4000 shares, for which I paid a total of [(1000*100.01)+(1000*100.02)+(1000*100.03)+(1000*100.04)=] 400,100

I now hit your bid and sell you back all 4000 shares at 100.03 for a total of 400,120

I just made myself $20. Thanks very much. Rinse, lather, repeat.

Now, you can see how some people might claim that I'm manipulating the market because I'm issuing orders into the market with the intent/expecation that the price will move as a result. But it's all a bit of a grey area.

However, I might argue that I'm merely taking advantage of bids and offers that are already in the market. If the market-maker on the other side wants to quote prices that allow me to make a profit (or, more accurately, if he's been stupid enough to roll out a market-making algorithm that does that), then why shouldn't I take advantage of it?

If this is what happened, then I'm surprised that Timber Hill decided to make an issue of it. If I'd been that stupid, I probably wouldn't want to draw everyone's attention to it. I would put the loss (which is this case appears to have been kless than $70k) down to experience, fix my algorithm and move on.

People/banks/brokerages/traders/hedge funds do make mistakes like this. A long, long time ago, when I was younger and far more stupid than I am now, I once gave a trader a market-making algorithm that used the market mid to set the bid/ask but which didn't have a bulletproof failsafe built in to recognise when there was noone else in the market. I foolishly assumed that the trader wouldn't use the algorithm unless there was a liquid market. Early one morning, the trader comes into work and switches on all his quotes before he's had his coffee. Nobody else was quoting this particular instrument at the time and someone else realised that they could effectively "fool" my trader into moving his price by submitting a quote which would move the mid, resulting in the algo moving my trader's price. They did this and then hit him for an unrealistic price. Cue panicked phone call from the trader, what the hell's going on, blah blah blah. We managed to get the trade cancelled in the end, because the price was so unrealistic but, even if we hadn't, it would never have occurred to us to complain about market manipulation. We would have just sucked it up, learnt the lesson and moved on because, quite frankly, if we'd spotted an opportunity like that, we'd have done the exact same thing!

Mind you, there are limits - Google Citigroup Dr Evil Trade for an example.

D.
..is for Don't Try This At Home!

Okay, tell us where the budgie is.

Or the cat gets it.