COLUMN-How Volkswagen set the pace for the new era of 'smart fraud'

Wed Oct 7, 2015 12:18pm EDT
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(Lynn Stuart Parramore is a contributing editor at AlterNet, co-founder of Recessionwire and founding editor of New Deal 2.0 and She is the author of "Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture." The opinions expressed here are her own.)

By Lynn Stuart Parramore

Oct 7 (Reuters) - Welcome to the age of smart fraud.

You've got to hand it to the masterminds at Volkswagen. With its elaborate plot to fool regulators on diesel car emissions, the German car company has set the pace for a new era of inventive, turbocharged cheating. The scam moved at the speed of light, with a brazenness beyond belief.

It was as hard to catch as it was profitable to execute. For seven years, Volkswagen got away with making pollution-belching cars seem environmentally friendly. It left consumers helpless and regulators stymied.

High-tech fraud seems to be taking place everywhere - from the shimmering towers of Wall Street to the seedy world of online adultery. Ashley Madison, the hacked hook-up site for people looking to cheat on their spouses, allegedly set up fembots that sent fake messages to fool male users into thinking that real live women awaited them if they paid a fee to join, instead of fancy bits of computer code. The Federal Trade Commission had evidently not noticed that what appears to be a giant swindle had been going on since 2001.

Smart fraud, such as VW's emissions scam or Ashley Madison's robot dates, began to be understood in the late 2000s, when something weird started happening on stock markets. At the moment of trade, large blocks of available stocks began to vanish, only to suddenly reappear at higher prices. An employee of the Royal Bank of Canada named Brad Katsuyama made it his mission to find out what was up. After much sleuthing, he was astonished to learn that an intermediary was jumping into his trades. It was happening in nanoseconds.

High-frequency traders with super-fast computers were engaged in an epic game of front-running right under the noses of the U.S. Securities and Exchange Commission and some of the biggest financial firms on Wall Street. Using sophisticated algorithms, they were able to stay split seconds ahead of everyone else, driving up prices and cheating savers and investors.

Katsuyama eventually quit his job and founded IEX, an exchange dedicated to fair play in trading, where high-frequency traders couldn't engage in financial arbitrage. The story was immortalized by Michael Lewis in his book Flash Boys. It spurred lawsuits and prompted the SEC to set up new rules for cybersecurity and monitoring, and also fine the New York Stock Exchange for oversight violations.   Continued...