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Gaming the System = $1,000,000 USD?

Business news channel CNBC has recently been running a competition where the holder of the best virtual investment portfolio over a certain period would win $1 million USD.

It appears that the lure of so much cash was too much for some people. Claims have been made that the winners of the competition may have exploited a weakness in the browser-based system that was used to track and manage the competitor's virtual portfolios.

Specifically, it appears that if a competitor opened a browser window with a pending trade prior to the closure of the stock market at 4 pm, then it was possible to conduct an after-hours trade at the closing price. This meant that competitors could observe stock price movement in after hours trading, especially large movement associated with major company news and dividend allotment, and adjust their trade accordingly.

Because the system being used by CNBC did not flag these trades as improper, it allowed competitors to build a significant advantage over those not using the system.

The case was highlighted by a competitor who was using 1,600 virtual portfolios to try and cover the movement in the market (a practice that some regard as outside the spirit of the competition).

While CNBC have engaged the services of some external security experts, there could be grounds for legal action against CNBC by affected competitors (especially with so much money at stake). CNBC have also suggested that other attempts to defeat the system were used, though apparently not as successful.

It should be noted that the exploitation of the system weakness actually parallels a real but unethical trading problem that some markets have faced in the past, where preferable trades between interested parties have been made using significantly outdated pricing data.

13 June 2007

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