4 ms·

It's always been unclear to me why the fines in these cases are so laughable. Trader produces several millions of dollars of gains with purportedly bad faith s

by boulos 11y ago

It's always been unclear to me why the fines in these cases are so laughable. Trader produces several millions of dollars of gains with purportedly bad faith spoofing, fine is $275,000. Of course nobody would stop, the fines are lower than income or even sales tax...

discardorama 11y ago
I came here to say the same. These people are economics masters; if the incentives are wrong, they'll take full advantage of them. Make the fine 1.5X the profits, and watch the problem dry up in a flash.
- rprospero 11y ago
  The 1.5x the profits issues may not be enough. A few years back, I read a story about a doctor who ran a scam that would assure the sex of your unborn child for $3000. Now, his treatment literally did nothing and he knew this. Half his patients didn't get the gender they paid for. He'd bring the distraught parents in, immediately hand over a full refund, talk about how the procedure was only 99.95% effective, then offer the parents another $1500 back as sign of his sincere regret. Basic algebra shows that, despite doing nothing, he could expect to make $750 per patient, despite doing nothing, because the half of the children who had the sex desired by their parents more than paid for the half that didn't. As you said, these people are masters of economics. If there is less than a 66% chance of being caught, a 1.5x fine means that there's still money to be made.
  - msandford 11y ago
    Which is why a 10x the profits number makes a lot more sense. At that point you've got to be VERY sure you won't get caught. It'll also encourage the beancounters in bigger organizations to just make people do the right thing. Once the fine becomes big enough no amount of "it'll be OK, we won't get caught" goes out the window.
  - selestify 11y ago
    That's actually a well thought-out scam, where can I read more about this doctor? I wonder how he finally got caught.
  - steven2012 11y ago
    This is similar to the joke about someone running a lottery for $1, with a chance of winning a live donkey. 1000 people buy tickets, and the winner comes to claim their prize, and discovers a dead donkey instead. So he complains, and the lottery runner give him back his $1. The key is to fine them for every patient, not just the patients that complain, because every patient is being defrauded, not just the ones who complain. Then 1.5x will actually be meaningful.
- TeMPOraL 11y ago
  There's no need to guess whether 1.5X would be enough, or you need 10x or something. Instead, start with a fine that would make the expected profit of the scheme zero, then add some more as a tax for being a sociopathic asshole, and then tack in some more for good measure.
Maarten88 11y ago
Fines should be much higher to have any effect, but it will not really change the game. I feel little empathy for other parties who have lost money because of this, the whole system seems to have become an arms race between mathematicians/programmers, where the most audacious one (who does not get caught) wins. There is no economic value in any of this. I think trading in derivatives as a whole is too cheap: reading the article it seems trading against yourself is cheap enough to use it to manipulate others. Taxing derivative trading (I say casino tax but any small percentage would work) would stop all this nonsense trading instantly, only leaving trading that is actually valuable to someone.
fixxer 11y ago
It has always been unclear to me why there are fines. Why is the book sacred knowledge? You should expect deception.
consz 11y ago
How do you measure what the profits from his illegal trading was? It's not like he ran this one strategy unchanged for years -- only some percentage of his orders fall into non-bonafide.
- hawkice 11y ago
  Good point, but the idea with the fine isn't restitution, it's to create an honest-to-God disincentive for bad behavior. Zeroing out their ill-gotten gains merely teaches them not to be caught. If the fines are 20x, 100x or 1,000x the provably ill-gotten gains, it stops making sense to even try. It's also important to note: (1) the higher fines could be easily supported by the individual without him leaving the top tax bracket, and (2) the activities are illegal even if you don't make money off of them, so limiting it to a multiple of earnings is a bad/wrong framing.
  - userbinator 11y ago
    If the fines are 20x, 100x or 1,000x the provably ill-gotten gains, it stops making sense to even try. Depends on the probability of getting caught... remember that these traders are likely to be very experienced at assessing risk vs reward.
    - hawkice 11y ago
      True -- you think we are catching less than 1/1,000 of these? There's that old saw about how it's impossible to know if people commit the perfect crime because, by definition, it involves us not knowing. That being said, a couple percent of people in the companies would object, I'd imagine (this assumes they aren't much worse than average).
usefulcat 11y ago
Important detail: the fines mentioned in the article are from the exchanges, not the government. On one hand, this sort of trading probably exacts some amount of reputational toll on said exchanges, at least to the extent that the practice becomes publicly known. On the other hand, it definitely provides them with material gains, as the fees they charge are typically on a per-share basis.

by boulos 11y ago

discardorama 11y ago

I came here to say the same. These people are economics masters; if the incentives are wrong, they'll take full advantage of them. Make the fine 1.5X the profits, and watch the problem dry up in a flash.

rprospero 11y ago
The 1.5x the profits issues may not be enough. A few years back, I read a story about a doctor who ran a scam that would assure the sex of your unborn child for $3000. Now, his treatment literally did nothing and he knew this. Half his patients didn't get the gender they paid for. He'd bring the distraught parents in, immediately hand over a full refund, talk about how the procedure was only 99.95% effective, then offer the parents another $1500 back as sign of his sincere regret. Basic algebra shows that, despite doing nothing, he could expect to make $750 per patient, despite doing nothing, because the half of the children who had the sex desired by their parents more than paid for the half that didn't. As you said, these people are masters of economics. If there is less than a 66% chance of being caught, a 1.5x fine means that there's still money to be made.
- msandford 11y ago
  Which is why a 10x the profits number makes a lot more sense. At that point you've got to be VERY sure you won't get caught. It'll also encourage the beancounters in bigger organizations to just make people do the right thing. Once the fine becomes big enough no amount of "it'll be OK, we won't get caught" goes out the window.
- selestify 11y ago
  That's actually a well thought-out scam, where can I read more about this doctor? I wonder how he finally got caught.
- steven2012 11y ago
  This is similar to the joke about someone running a lottery for $1, with a chance of winning a live donkey. 1000 people buy tickets, and the winner comes to claim their prize, and discovers a dead donkey instead. So he complains, and the lottery runner give him back his $1. The key is to fine them for every patient, not just the patients that complain, because every patient is being defrauded, not just the ones who complain. Then 1.5x will actually be meaningful.
TeMPOraL 11y ago
There's no need to guess whether 1.5X would be enough, or you need 10x or something. Instead, start with a fine that would make the expected profit of the scheme zero, then add some more as a tax for being a sociopathic asshole, and then tack in some more for good measure.

Maarten88 11y ago

Fines should be much higher to have any effect, but it will not really change the game. I feel little empathy for other parties who have lost money because of this, the whole system seems to have become an arms race between mathematicians/programmers, where the most audacious one (who does not get caught) wins. There is no economic value in any of this. I think trading in derivatives as a whole is too cheap: reading the article it seems trading against yourself is cheap enough to use it to manipulate others. Taxing derivative trading (I say casino tax but any small percentage would work) would stop all this nonsense trading instantly, only leaving trading that is actually valuable to someone.

fixxer 11y ago

It has always been unclear to me why there are fines. Why is the book sacred knowledge? You should expect deception.

consz 11y ago

How do you measure what the profits from his illegal trading was? It's not like he ran this one strategy unchanged for years -- only some percentage of his orders fall into non-bonafide.

hawkice 11y ago
Good point, but the idea with the fine isn't restitution, it's to create an honest-to-God disincentive for bad behavior. Zeroing out their ill-gotten gains merely teaches them not to be caught. If the fines are 20x, 100x or 1,000x the provably ill-gotten gains, it stops making sense to even try. It's also important to note: (1) the higher fines could be easily supported by the individual without him leaving the top tax bracket, and (2) the activities are illegal even if you don't make money off of them, so limiting it to a multiple of earnings is a bad/wrong framing.
- userbinator 11y ago
  If the fines are 20x, 100x or 1,000x the provably ill-gotten gains, it stops making sense to even try. Depends on the probability of getting caught... remember that these traders are likely to be very experienced at assessing risk vs reward.
  - hawkice 11y ago
    True -- you think we are catching less than 1/1,000 of these? There's that old saw about how it's impossible to know if people commit the perfect crime because, by definition, it involves us not knowing. That being said, a couple percent of people in the companies would object, I'd imagine (this assumes they aren't much worse than average).

usefulcat 11y ago

Important detail: the fines mentioned in the article are from the exchanges, not the government. On one hand, this sort of trading probably exacts some amount of reputational toll on said exchanges, at least to the extent that the practice becomes publicly known. On the other hand, it definitely provides them with material gains, as the fees they charge are typically on a per-share basis.