Lots of hub bub in the poker community about some apparent cheating that has been going on at AbsolutePoker.com. Bobby has a nice comic about the cheating at PlusEV.net, and probably the best place to get info and updates is Absolute Poker Cheats blog that was setup just for the occasion.
Traders will appreciate this chart showing how much of an outlier one suspected cheater is. That red dot in the upper right corner represents the win-rate of the suspected cheater. The trading analogy would be a trader who trades 90% of the stocks on the market and correctly predicts the stocks movement 90% of the time. With stats like these, you could make an insane amount of money. And that’s exactly what these guys have done, reportedly making hundreds of thousands of dollars in a short time.
from the Absolute Poker Cheats blog
For the poker illiterate, VPIP stands for “variably put money into pot”, which is a statistic that tracks what percentage of hands you play. Good players are in the 15-30% range. The cheaters are in the 70-90%.
BB/100 stands for “big blinds per 100 hands”, which measures how profitable you are. So if you were playing $100/$200 poker with a 1BB win-rate, you would win on average $200 every 100 hands. Winning players can make about 1-3BB/100 at the medium and high limits. In the short term (across a small number of hands), lucky players can make about 100BB/100 hands. The cheater graphed makes 500BB/100.
The graph is pretty damning, but probably most damning of all (at least to a poker player with a bit of knowledge) is to go over some of the actual hand histories that leaked for this player. You can read some play-by-play analysis with some guesses as to the cheaters thinking here or see a video replay of the hands here (requires a free registration). The short of it is that the villain is playing uncannily like he/she can see the other players cards.
Is there cheating like this going on in the stock market?
Obviously, Martha Stewart-style insider trading goes on, but what I’m thinking about here is the kinds of cheating available to unethical brokers. Unlike the online poker rooms, many of the big brokers have their own traders “playing” in the same market as their clients. This creates the same kind of conflicts-of-interest that the poker sites try to avoid.
When you buy or sell stock, brokers will already make money off the “spread” in a move called “internalization“. (Is this even legal?) What else can the big guys do with all of their traders information?
They could enact “follow-the-leader” tactics, similar to what you can do by tracking successful investors on a site like StockTickr or CakeFinancial. “Hedge Fund X is making money in the oil stocks, let’s buy when they buy.” Granted, following the heard can be dangerous, since past results don’t ensure future success. However, when you can move faster than the rest of the heard (just place your orders before theirs), there is less risk.
Or how about just having better information than the rest of us. When I’m trading a stock, I’ll look at the volume and price action and try to figure out what the buyers and sellers are up to. It’s an inexact science. However, if I was a large broker, I could overlay the price/volume data on top of the actual trade and portfolio information to be able to tell for instance whether the sellers are taking profits vs. panicking… or if the buyers are adding to winning positions or doubling down on losers. All of this is very useful stuff that could inform your trade decisions.
But the brokers are regulated.
Sure, the SEC is on top of things and it really isn’t in the best interest of these companies to blow it in a scandal and lose everything. And I have no inside information to know that stuff like the above is going on. I’m sure the majority of the management at these brokers is very ethical and actively tries to keep things clean.
However, I thought the same thing about the online poker rooms. Why would they cheat if they were making so much money legitimately? Online poker rooms are regularly checked out by third parties and verified clean. It’s not even clear that the poker room is endorsing the cheating itself… it could be one disgruntled worker or a hacker who has gained access to the traffic coming in and out of the site’s servers.
The same kind of breakdown could happen with a broker, giving one privileged trader access to information that others don’t have. And like poker, it would take a semi-skilled trader to know how to take advantage of the new information, but the end result would be lots of folks losing money to the super trader.
I could go on for a while, but I’ll stop here. I just wanted to let some of you in on the current discussions going on in the poker world and comment a bit on how these events relate to traders. I personally have no proof to the fact that either Absolute Poker or an investment broker is (illegally) cheating you out of money. However, it’s kind of interesting to think about how it could happen and what we would do.