The Price of Hiding Quant Glitches

You can quant but you can't hide.

Two weeks ago Axa Rosenberg Group paid the SEC $242 million for hiding a glitch in its quantitative computer model that caused millions in losses to its clients.

Axa, which has an estimated $30 billion in assets under management, returned $217 to the cheated investors and will pay a $25 million penalty to the government agency.

The interesting this about this news is not just that the firm tried to hide its high-tech errors, but that the fine itself was so substantial. Even for a quant trading firm with billions in its coffers, $25 million is still a significant sum for admitting to the cover-up of a technical error.

"This is a wake-up call to all 'quant' managers," said Bruce Karpati, co-head of the SEC's asset management enforcement unit in a story from The Financial Times. "They can't rely on their secretive structures and complex computer models to keep material information from investors."

According to the news report, the SEC's investigation into Axa is on going and the alternative investment firm neither admitted nor denied wrongdoing. The SEC said 608 of the firm's 1,421 clients were affected.

"We deeply regret that the coding error adversely impacted many of our clients," said Dominique Carrel-Billiard, chairman of the board of AXA Rosenberg in a company statement. "The exhaustive review that we undertook of this matter reflects our commitment to regaining our client's confidence and restoring trust."

In the same statement, AXA Rosenberg says that over the past several months, "the firm has reshaped its organizational structure, appointed new leaders for several key positions and instituted additional risk controls and procedures. Among the changes are new senior hires, including the appointment of Jeremy Baskin as Global CEO."

"Today marks the beginning of a new era for AXA Rosenberg," says Baskin. "Having made many changes to our organizational and ownership structure, our management team and how we do business, we look forward to the opportunity to again demonstrate our unique value in helping our clients meet their investment goals in the future."

We'll see if this new commitment also includes owning up to errors in their quantitative trading models. Stay tuned. Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio