Ingenious Day Trader Scam

This is a crime where you have to think for a bit to figure out who the “victim” is…

A day trading firm who also ran a “virtual trading” platform where folks could practice trade on a market that mirrored the real thing, must have gone through the following thought process:

“Hmmm, we know that greater than 90% of all day traders fail and lose their money. Therefore if we trick them into trading in our virtual account and make them think it’s the real one- we will also have a greater than 90% chance to make money- as in 100% of the losses the traders make will be ours”.

Of course this breaks all kinds of security and ethics laws, but on the surface, it sounds like it could work as long as they didn’t get good traders on board who actually made money. However, they had a plan for this possibility too- any trader that turned out to be good, they then moved them over to the real account to continue.

So their goal was to recruit inexperienced traders with the lure of “getting rich quick”, and have them lose their money, never realizing that they were in a simulated account.

They wound up making over a million dollars in gains before the SEC caught up with them and put an end to their virtual gravy train.

Here’s the story link:  http://dealbreaker.com/2016/12/day-trading-ponzi-adventure/

 

So who is the true victim here?

The easy guess is the trader who is on the virtual account, but the virtual account mirrors the real market so their losses would have been real regardless. A true victim would have been a trader who made a profit and then tried to withdraw their money from a fake account- but so far there’s no report of any such victims, as the firm moved the few “winners” to real accounts and payed them with the money from those losing.

The actual victims turn out to be the exchanges and market makers that buy and sell the actual stocks and investment products. They make money on the difference between the bid and asking price.

A trading firm typically makes money on order flow and trading commissions per transaction. Since the firm wasn’t actually buying the stock, they were at risk and having to pay out any profits out of pocket- but they were counting on the high probability of traders losing to minimize that risk.

If not for the SEC, this could have gone on indefinitely as long as they didn’t wind up with a bunch of good traders to break the bank.

 

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