Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Thu, 13 Aug 2009

Madoff and his AS/400

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.

Posted at 14:11 on Thu, 13 Aug 2009     View/Post Comments (0)     permanent link