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A blog on financial markets and their regulation
The brain behind Madoff’s huge fraud has been revealed
– it was the well known IBM AS/400 minicomputer. Well, that is a
bit of an exaggeration, but only slightly so. The SEC complaint
against a key Madoff lieutenant, Frank DiPascali, turns out to be a
long litany of the accomplishments of his AS/400.
Printing millions of pages of trade confirmations (one for each
stock and for each account for every fictitious trade) was one of the
major uses of the AS/400. DiPascali also used a random number
generator program to break up the massive trades into orders of
various sizes and prices and to randomly distribute the trades across
different times. Apart from the AS/400, Madoff also had a fake
computer trading platform set up in the office, just in case somebody
wanted to witness real time trading.
For all its prowess, the AS/400 could not generate trade blotters
and order tickets. Perhaps, doing this with credible execution times,
counterparties and executing brokers would have needed more powerful
machines (and tick level price feeds not to mention top quality
programmers) of the kind employed by the hedge funds that do high
frequency trading today.
I get the sense that while Madoff was an early adopter of
technology, he did not keep pace with it in the later years. As
investors started demanding faster trade confirmations, the amount of
time that DiPascali could look back to construct the profitable phony
trades became shorter and shorter. I suspect that even if the market
crash of 2008 had not blown up the Ponzi scheme, it would have become
harder and harder to keep the ruse going with the aging technology
that Madoff and DiPascali had available to them.