The “gravy” train has stopped for Athena Capital Research.
The SEC sanctioned the high-frequency trading firm and fined it $US1 million for manipulating the prices of thousands of stocks on the NASDAQ in the final seconds of the closing auction for at least six months (way back in 2009). It’s the first high-frequency trading manipulation case from the SEC.
This case, like so many before it, is complicated in its mechanics (see Matt Levine for a better explanation than I could ever attempt), but simple in its failure. There are lots of way to engage in financial fraud, but there’s pretty much one solid way to get caught: talk about it in an obvious way in a place where the SEC (or Preet Bharara, or Eric Schneiderman) can find you.
The SEC’s order about the case reads mostly as a lesson in how not to communicate with your coworkers when engaging in market manipulation. Here, from the text of the SEC order, is how Athena allegedly manipulated the market — and what they did to get caught.
Mistake 1: They used suspicious sounding names
If you’re trying to hide illegal activity, then don’t name your algorithm something that’s also a slang term for illicitly gained profits.
“Between at least June through December 2009 (the ‘Relevant Period’), Athena made large purchases or sales of the stocks in the last two seconds before NASDAQ’s 4:00 p.m. close in order to drive the stocks’ closing prices slightly higher or lower. The manipulated closing prices allowed Athena to reap more reliable profits from its otherwise risky strategies. Internally, Athena called the algorithms that traded in the last few seconds ‘Gravy.'”
Mistake 2: They got big
According to the SEC, “the massive volumes of Athena’s last-second trades allowed Athena to overwhelm the market’s available liquidity and artificially push the market price — and therefore the closing price — in Athena’s favour.” Athena, despite being a relatively small firm ($US40 million in assets under management at the time), made up almost 70% of trades during the final seconds of trading in these stocks during the period the SEC looked at (between June and December 2009).
Trading a lot is not necessarily indicative of market manipulation — HFT firms buy and sell a lot of shares very rapidly, that’s pretty much the definition. But the bigger you are the more attention you attract. And the more the SEC might look into whether what you are doing is market manipulation. That was sort of a problem for Athena, as its strategy only worked if its trades made up most of the market in the last few seconds of the day, every day (see below, the emails!).
Mistake 3: They left a paper trail
It’s unwise to email your colleagues about the illicit scheme you are involved in together. The SEC will get you. And then they will publish your embarrassing emails on the internet. And we will all laugh at you.
At one point, an Athena manager noticed that at too small a scale, Gravy didn’t have any price impact, and thus emailed another manager and the company CTO to suggest that they, “make sure we always do our gravy with enough size.”
Later, after the NASDAQ issued an alert that “Suspicious orders or quotes that are potentially intended to manipulate the opening or closing price will be reported immediately to FINRA,” the SEC says that Athena’s CTO (their CTO!) forwarded the alert to the two managers involved and wrote: “Let’s make sure we don’t kill the golden goose.”
Protip: brush up on golden geese in popular culture before adopting it as a code phrase.
That said, the ultimate lesson here might be that market manipulation is worth it. The SEC fined Athena $US1 million and made it promise never to manipulate the market in this way again. However, the company did not have to admit wrongdoing, despite the litany of embarrassing emails uncovered.
The order never says how much Athena made off this strategy, but on one particularly bad day it lost $US2-3 million. So this SEC order seems like not great for the firm, but a lot less of a deterrent than the flaws in the algorithm itself.