Hedge Fund and Algorithmic Trading Fraud

Hedge funds are pools of capital from various investors, used by hedge fund traders (also called Portfolio Managers) to generate profits in financial markets.

As a manger of a hedge fund, your needs are distinctly different from those of typical retail customers. The ultimate return of a trade for the fund is only partly due to the success of selecting a particular security or investment. Each trade is also heavily affected by the quality of trade executions, the accuracy of risk tracking metrics, and the performance of your trading platform. You should be entitled to rely on the information being provided to you by your platform, including data on security prices, calculations, and “Greeks” that your system interface is providing you. You also reasonably expect that when you select a trade and enter it, that it will be executed quickly and at the best available price.

Time and again, purportedly sophisticated trading platforms have shown that they cannot or will not provide the level of service and accuracy that hedge funds and their management teams require and expect. Some firms advertise their systems as delivering the pinnacle of available trading tools; the reality, however, is that those tools fail to properly service large, complex, and rapidly moving trading portfolios. This can develop and cause problems in the form of reporting inaccurate prices or option data, or in the miscalculation of margin requirements. Firms often violate their duties of best execution when they fail to route orders to the correct markets, and instead internalize trades with their own dark pools. Firms that don’t understand their own risk can panic and end up taking commercially unreasonable actions against their customers.

In an industry where every penny counts, and mere seconds can be the difference between profit or loss, you need a law firm that understands the industry, the trading strategies and the back-office operations of your broker. At Shepherd, Smith Edwards and Kantas, we have proven our ability to generate recoveries for hedge funds and institutional traders in cases where the brokerage firms did not deliver the service required. Our lawyers and staff are well versed in these subjects and have the necessary skills to breakdown complex trading issues so that juries and arbitrators can understand how your broker failed to live up to their end of the bargain.

Algorithmic Trading is automated trading by computers which are programmed to take certain actions in response to varying market data.

Over the last two decades, there have been great technological advances made in the world of computerized trading and execution. This has allowed for the commoditization of brokerage services that has brought down the cost of trading, and increased the speed, efficiency and likelihood of quality trade executions. Trading conducted by algorithms have also opened up arbitrage and other investment opportunities that were impractical or cost prohibitive in earlier times.

As with any new technological advances, however, there is a dark side to complex automated systems. When advanced computer systems break down, or were never properly designed in the first place, trades might be executed at non-market prices destabilizing the entire market for a security. Relatively small trades entered and executed improperly can create excessive volatility. These issues affect not only the trader making the trade, but also each participant in that market. Without proper systems and controls, algorithms can take over the market to disastrous consequences, just as they did in the May, 2010 “Flash Crash”.

Likewise, nefarious and sophisticated traders use complex tools and programs to manipulate markets and to take advantage of pricing anomalies. This can take the form of “spoofing”, “quote stuffing”, “trade throughs” or other underhanded manipulative schemes, each designed to destabilize a market to the trader’s profit and others loss.

Who is responsible for losses suffered by retail investors, when computer systems run amok? Who should bear the losses when trades are executed into a manipulated market? At Shepherd, Smith, Edwards and Kantas, we have experience winning these difficult cases and obtaining recoveries for our clients. Our lawyers and staff are well versed in these subjects and have the necessary skills to breakdown complex trading issues so that juries and arbitrators can understand who was victimized and who is at fault.

We offer a free, no obligation case consultation.