
Don't Steal Money from Day Traders Before They Lose It - thaumasiotes
https://www.bloomberg.com/view/articles/2018-09-06/don-t-steal-money-from-day-traders-before-they-lose-it
======
anonu
I was a trader at a big bank for many years. The tools and access I had there
put me in a different class of trader that very few other firms or individuals
can attain. There is such information and technology asymmetry in this
business - its not worth trying to day trade as an individual. Buy and hold
forever... only way to invest.

~~~
qwtel
I find it hard to believe there’s any day trader using any kind of information
making a consistent profit. Isn’t everybody just dabbling around hoping to be
in the 50% that outperform by chance?

i’ve read about ed thorp pioneering statistical arbitrage in the 80s (?) which
would fit the bill of “consistent returns”, but I doubt that there is any of
that left close to 50 years later.

I’m wondering what all these quantitive funds are doing.

~~~
speedplane
The only way you can consistently make money is by knowing things others do
not (e.g., insider trading) or by taking advantage of structural problems or
inefficiencies in the trading platform (e.g., high frequency trading).

I do believe that insider trading is rampant. I've seen many occasions where a
large corporate announcement sends a stock up or down, but hours before, you
can see the price of the stock slowly slide in the direction. Obviously a
certain amount of that may be random/explainable, but I've seen it a lot and
my intuition says more is going on. This also seems relatively easy to
quantitatively measure, I'd love to see a real analysis of it.

~~~
VBprogrammer
I find the market for knowledge which others do not have but which aren't
actually illegal to be quite fascinating.

There is a company who will break down a brand new car into its component
parts and by knowledge of materials and production processes can tell to a
very narrow margin what the cost of producing that car is - and therefore the
profit potential of each sale. The information about the number of cars sold
is either public or more easily obtained than the actual company accounts
(public in many jurisdictions due to car registrations).

There are other companies who will buy a bunch of iPhones for example and by
carefully analysing the serial numbers can deduce to within a reasonable
margin exactly how many have been sold.

Using information like this I'm sure most large trading firms have very good
models of the likely performance of each publicly listed company.

I wonder how far down this rabbit hole things go. Do they have people standing
outside factories counting how many cars leave on the back of the truck? Do
they have access to systems like Galileo in the travel industry where they
could figure out how many seats had been booked on a plane, or how many rooms
were booked in a hotel? They can then take a good guess at staffing / fixed
costs and arrive very much in the correct ball park.

~~~
laurentl
> There are other companies who will buy a bunch of iPhones for example and by
> carefully analysing the serial numbers can deduce to within a reasonable
> margin exactly how many have been sold.

AKA the German Tank Problem
([https://en.wikipedia.org/wiki/German_tank_problem](https://en.wikipedia.org/wiki/German_tank_problem)).
Fascinating application of statistics.

~~~
mamon
Except it only works when serial numbers are sequential, I believe the common
practice today is to have serial numbers to be random alphanumeric strings.

~~~
washadjeffmad
Not usually, and especially not for physical products. An 8 digit alphanumeric
serial contains 2.82E13 possible values (which is more than any one company
will sell of anything, ever), and it'd be crazy not to use that to store some
kind of information like models, series, bins, etc. Two characters allow
almost 1300 possibilities, and just three give over 46,000. Our POs have 6
digits, and after over two decades of multiple weekly deliveries, we're still
in the 500000s.

To make that random would be a huge waste and also destroy the potential for
creating visible patterns helpful within a lot of industries.

Edit: I just thought about redemption codes, which yes, do aim to be
randomized have a huge space relative to the issued codes. In those cases, I
see what you mean. Serials of digital media are often and intentionally
randomized.

------
jpeg_hero
Huh, got through the whole article without the author referencing the origin
of the term “bucket shop.” Nothing new under the sun when it comes to market
manipulation. I like the idea of a whole new generation of crypto market
manipulators rediscovering techniques that haven’t worked in eh real markets
in 100 years.

[https://en.m.wikipedia.org/wiki/Bucket_shop_(stock_market)](https://en.m.wikipedia.org/wiki/Bucket_shop_\(stock_market\))

 _The transaction goes "in the bucket" and is never executed. Because no
trading of actual securities occurs, the customer is essentially betting
against the bucket shop operator in a game based on abstract security prices._

~~~
cissou
I think a big difference here is that bucketeers knew they weren't actually
buying the securities, and just waging against one another. The scheme in the
article is like a combination of a bucket shop and a concealed ponzi scheme

~~~
arethuza
Is running a bucket shop still illegal even if you are open with everyone that
it is a bucket shop and people are just gambling?

~~~
tim333
The modern equivalent is spreadbetting. We have loads in the UK.

------
akanet
This is so interesting - one wonders if this is strictly immoral. I propose
this thought experiment: What if there was a version of this fraudulent
brokerage that conducted this behavior in the open?

Let's say their policy is something like, "You trade for real under favorable
commissions and margins. If we decide via internal algorithms that you are
liable to lose money, we will instead pocket your trade and credit you 10% of
the money you would have lost back. If you win, you win in full as normal."

Would this be immoral? Illegal?

~~~
mewse
That's basically taking a short position on whatever the customer thinks
they're buying, right?

Whenever the customer wants to sell their position, you'd have to pay them
whatever the value was at that time, whether the position had gone up or down.
Big risk, unless you're confident that the customers are going to reliably
make terrible trades, on balance.

It might still be fraud maybe if you claimed to be performing a service that
you're not performing, but if you actually told your customers that you were
doing it (as in the situation you ask about), then I can't see how it could be
breaking any laws. And I'm not certain why your customers would even care, and
might even prefer it, due to the "get 10% back if you lose everything" clause
which you don't get with normal day trading.

~~~
thaumasiotes
There are laws against naked shorting, even when you've personally determined
that the stock will tank as evidenced by the fact that an idiot is buying it.

There are arguments that naked shorting should be allowed, but it isn't
allowed right now.

~~~
ycombobreaker
the parent poster means simply betting against their customers. Not explicitly
shorting a security without a locate. Just a lingo thing. In any case, this
sounds a lotvlike a Contract-for-Difference type of arrangement. The broker
functions as the liquidity provider, taking the contra side to all customer
bets. Broker collects the bid-ask spread and hopes that it overcomes losses.
One big downside is counterparty risk: if the broker goes bankrupt, the
winning customers may not get paid!

------
speedplane
I don't day trade, I mostly keep my money in ETFs and other dumb securities.
But every now and again, I see the market move in such a completely
unreasonable way, most often hammering a stock on some bad, but not awful
news. In these cases, I've made small gambles and bought the stock when it's
low to see it recover every time. My sample size is small and I'm too
conservative to bet the bank, but I haven't been wrong yet.

~~~
sumedh
> I'm too conservative to bet the bank, but I haven't been wrong yet.

You are being cocky because you are dabbling with small money, when you play
with big money, your emotions will immediate change and that is when you will
make mistakes.

~~~
speedplane
> when you play with big money, your emotions will immediate change and that
> is when you will make mistakes

That's precisely why I don't play with big money, not that I have so much
anyway. I wonder though, if I was playing with someone else's "big money", if
you could keep those emotions in check.

~~~
fossuser
That’s the real trick - convince others to give you a lot of money and when
you win you get a big cut and when you lose it’s not your money and you just
do something else.

Seems to be the way all hedge funds operate, maybe can even charge membership
fees too.

~~~
speedplane
Right... most traders get big bonuses when they win, but if they lose, at
worst they get fired. If you can win for a while and then get fired
eventually, you'll still end up on top.

~~~
gaius
Trader A makes $10m in year 1 and gets a $1m bonus. She loses $10m in year 2,
and gets no bonus so the firm is down her $1m bonus.

Trader B makes $1m in years 1 and 2. That’s too low to trigger a bonus, but
his firm is up $2m.

The system doesn’t reward trader B so he has to choose: do what’s right for
the firm, or take big risks in the hope of a bonus

(Simplifying dramatically)

------
tsycho
To play Devil’s Advocate: How is this different from being a market maker? I
am presuming that if the customer actually made money, these guys would pay
them from their own pocket.

Or alternately, assuming zero or low enough transaction costs, if these guys
just took the opposite position of their customers for each trade (also known
as hedging) in the market, then wouldn't the net positions be exactly the
same?

Basically, the crime here seems "technical" or some sort of "you lied to me",
it's not that people actually got different returns than what their trades
entailed.

~~~
Lost_BiomedE
If they are doing this without disclosure, they are adding counterparty risk
without consent. Just because they didn't blow up does not mean they can't. It
doesn't even have to be due to your trade but someone else's. There have been
single trades that have blown up international banks. Rare, and probably
irrelevant here, but a point for perspective.

------
usaar333
> Nonko team decided to take advantage of this pattern by secretly providing
> some of Nonko’s customers with training accounts instead of live ones and
> simply pocketing those customers’ deposits.

Seems like a really dangerous move it they allowed trading on anything with
low volume (options, smaller stocks). All it takes is one trader to notice
their order never actually executed on the public market..

------
nandemo
Just by the title I knew it had to be a Matt Levine story.

~~~
bunderbunder
The man is a national treasure.

------
gesman
Trading is essentially an activity of showing numbers on a screen between
funds deposits and funds withdrawal.

Traders are playing with numbers. No one actually expects the paper shares to
be mailed after stock purchase.

Brokerage guarantees successful withdrawal event - and if not - then it's a
present and clear fraud.

So if brokerage does not actually do anything, but properly updates the
numbers on the screen according to security prices and commission schedules +
guarantees proper handling of deposit/withdrawals - no one essentially cares?

~~~
qaq
In this case brokerage exposes a client to counter-party risk that client has
no idea about.

~~~
gesman
Well, if customer prone to lose anyways - "brokerage" is in good shape to
collect commissions.

They'd be in trouble if customer suddenly strikes high margin gold and want to
withdraw.

------
mancerayder
Day trading is one thing (which IMO is absurd, if it's defined by not keeping
positions overnight). However, if you compare two people picking stocks, one a
professional trader and one a guy in his underwear at home or in a coffeeshop
on his phone, the former has mostly massive advantages. But he's missing one:
the guy in his underwear can afford time-wise to wait a longer timeframe. If I
buy a stock I think is a value buy and it crashes, I can hold it as long as I
need. The big bank trader has quarterly profits to worry about or his bonus is
his jeopardy, if not his job. He has a pool of money he needs to grow and he's
under tight scrutiny.

I don't recommend anyone do this, but I've achieved 27% returns trading in my
retirement account (the past 12 months as of today). I don't trade random
stocks, I don't buy and sell often, and I'm a news junkie so I'm constantly
reading the news. If I screw up on a buy, then it turns into a 'buy and hold.'

Lastly, I've worked closely with traders in the past, in a tech capacity. I
assure you, they're not all the sophisticated quant geniuses with carefully
placed bets that the HN crowd seems to imagine.

(edit: grammar)

------
brisance
How did the SEC discover this… did someone submit an order and it did not show
up on the exchanges?

~~~
Bluecobra
It’s in the complaint. They were using a third party vendor for both the live
accounts and the training accounts:

In the summer of 2014, the firm that owned and licensed Platform A discovered
Nonko’s training accounts scheme, after a technical inquiry from a Nonko
customer revealed that the customer wrongly believed that his training account
was a live one. On August 29, 2014, the owner of Platform A sent out an email
blast to all Nonko customers alerting them that accounts starting with “TR”
were training accounts; the firm then discontinued its relationship with
Nonko, accusing Nonko of deceiving its customers.

~~~
brisance
Ah, thanks for the update. The wheels of justice turn really slowly though.
Some of those account holders could've been long dead before they got their
money back. :(

------
Danieru
This is notable because in the United States the form of leverage common else
where, a contract for difference, is banned. Outside America it is much easier
to run these kinds of bucket shops. The key is offering leverage, Kelly's
formula suggests that stocks should be traded with a rather narrow band of
leverage, under two in most cases. Yet these shops always offer leverage
ratios more similar to forex. You would be hard pressed to convince me that
ten times leverage should ever be used with equities.

Meanwhile forex markets are even worse. Leverages there in the past were over
a hundred. Which explains why there is so much money to advertise forex. Shady
online ad markets are filled with ads offering high leverage online only forex
accounts. One can be fairly sure those shady forex accounts are nothing more
than bucket shops.

In general leverage is a mistake for most investors. Yet the appeal of hitting
high returns with low investment (retail investors using leverage tend to
measure return with no relation to risk), mean far too many retail investors
are playing with options than is safe.

~~~
toomanybeersies
IG will offer me, here in Australia, 5% margin on shares (20x leverage), 0.5%
margin on forex (200x leverage), 0.5% on indices, and form 0.7-4% on
commodities [1].

I set up a demo account a while back, and it's pretty impressive the amount of
money you can quickly make (and lose) with CFDs. It was possible on a $30,000
capital to make (or lose) over $1000 per day.

I'm a pretty risk averse guy, and also can't be bothered doing enough market
research that short term trading is a sensible idea, so I didn't end up
investing any real money.

[1] [https://www.ig.com/au/cfd-trading/charges-and-
margins](https://www.ig.com/au/cfd-trading/charges-and-margins)

~~~
kgwgk
> It was possible on a $30,000 capital to make (or lose) over $1000 per day.

Maybe there is a typo in your example? Making or losing 3.3% in one day does
not seem that impresive...

~~~
toomanybeersies
I was trading while I was still at work doing my real job, so I wasn't putting
100% of my attention to it.

3.3% daily (if you could consistently make a profit) is a very good return,
think about how fast that compounds. Most savings accounts aren't even 3.3%
per annum.

~~~
chronolitus
Head over to /r/wallstreetbets if you'd like to get a nice dose of adrenaline
/ heart attack.

------
mirimir
Hey, if they made sure to credit clients with any gains, does it really matter
where the losses went?

Edit: It could be in the ToS. "How can we offer such huge margins? Simple. If
our algorithms indicate that you're a loser, we just don't place your trades.
But whatever happens, your account will always be credited for gains that you
would have earned.".

------
adiusmus
If they hadn’t used third party providers they wouldn’t have been caught.
Nonko only got caught due to bad service/infrastructure design. So really the
systems in place to defend against this kind of thing aren’t working. Or not
working well enough. This is just an observation. I have no idea if this is
the sort of thing which _can_ be detected.

------
mattnewport
This article is typical of the complete lack of ethics in the banking and
finance industry. As he acknowledges, this is straight up fraud / theft and
yet he is sympathetic to the perpetrators. It's the kind of amorality and lack
of ethics that was so visible in the financial crisis. At least in this case
there appears to have been some actual enforcement unlike in the financial
crisis where essentially nobody in the industry was held accountable for their
actions.

It's not ok to defraud people or steal from them just because you think
they're stupid, either legally or ethnically. This is obvious to most people
but apparently not to the finance industry.

~~~
bunderbunder
Matt Levine is typically a voice for greater ethics in the industry. He just
happens to also have a very ironic sense of humor.

------
xchaotic
I'd always wondered if crypto exchanges actually bother to buy the crypto that
you ask them to. For most people they wouldn't know the difference as
eventually they'll withdraw in fiat money anyway

~~~
LeoPanthera
Very few crypto exchanges support fiat withdrawals. Most are crypto-in,
crypto-out, only.

------
segmondy
Isn't this sort of what the investment firms "dark pools" are doing? not
executing order in the public market but in their own private market?

------
thaumasiotes
I think the subtitle is much more informative:

> Boiler room guys knew customers were going to lose their money, so they
> allegedly spent it themselves.

But it was also illegally long.

~~~
abakker
you just gotta love Matt Levine headlines, though. The title is as much a play
on his constant "laws of insider trading" running gags and part of his daily
newsletter.

------
tlight
How about thermal imaging of oil tanks at Cushing Oklahoma!

------
msmith10101
How can you do your taxes if your trades are not executed?

~~~
tedunangst
You use the numbers provided by your broker at the end of the year.

~~~
msmith10101
So the IRS has no way of validating these numbers (they do require brokers to
provide the numbers these days)? Overall I'm just not buying that this story
is true, in other words.

~~~
ajdlinux
What makes you think the operators are giving correct numbers to the IRS, or
that the IRS would necessarily detect something like that on a fairly small
scale?

(I have no idea how any of this works, but I would assume that if they're
willing to defraud their own customers they're probably not acting entirely
above board on the associated tax paperwork either.)

~~~
msmith10101
I just think this story is not worth talking about. Two people created a fake
website. That is the story. This is a span story.

------
pfisch
Honestly, this sort of seems fine as long as they covered winners.

It doesn't actually matter from a black box standpoint who took their bets as
long as they were given the proper outcomes.

It isn't any different from running a casino really, except it has potentially
better odds.

~~~
wmf
You know they probably can't cover the winners, though. The SEC doesn't make
stuff like bucket shops illegal on principle; they make it illegal because
people got scammed.

