Bernie’s “investors” probably thought he was frontrunning through his marketmaking firm. The Najarian brothers (options guys) think Bernie’s strategy could have at most generated 4 to 5% before transactions fees which were probably low.
I think he was frontrunning and probably making just eneough before decimalization about 5 years ago or so. This is when stocks were quoted in 1/16s like 5 7/8s. When decimalization came it, they were quoted in pennies like $5.03. I think this is when his scam fell apart. He no longer had the bid ask spreads to keep it going.
His family knew and they all need to go to jail.
I think he was frontrunning and probably making just enough before decimalization about 5 years ago or so.
Yes, it's the logical conclusion. Also, as several market watchers documented with actual market data, his scale of operation simply could not allow for strategy to be impolemented successfully - because large buys and sells would move the market affecting the trades and because there simply was not enough liquidity (open interest volume) in the option market for him to buy puts and sell calls, let alone do it profitably. Simply, the strategy could not scale "to market", i.e., even if strategy could work well on a small scale (others tried something similar without otstanding results) Madoff would not be able to benefit from it with his outsized portfolio.
You may appreciate excerpts from these CNBC articles pretty much confirming it.
S.E.C. Knew Him as Foe and Friend
18 Dec 2008
As the Securities and Exchange Commission begins an internal examination into how it missed the red flags of one of the largest frauds in history, it will inevitably discover that Bernard L. Madoff was a Wall Street pioneer who over the last 20 years alternately impressed and infuriated the agency’s top policy makers.
Commissions led at various times by Republican and Democratic appointees came to see Mr. Madoff’s trading operations as a healthy alternative to the New York Stock Exchange. As one of the first companies to recognize the power and efficiency of electronic trading, Mr. Madoff’s stock-trading operation was able to offer deep discounts and quick execution, forcing the older exchanges to compete.
It was one of the first to offer trading beyond the traditional hours of Wall Street, a recognition of the growing global nature of the markets. And as it began to take business away from the more established market makers — middlemen between buyers and sellers of stock — like the New York Stock Exchange, it drew increasing criticism.
But the same officials who came to admire his efforts at making markets faster and less costly also challenged him when they thought Mr. Madoff pushed the boundaries too far.
Those conflicting approaches toward Mr. Madoff were perhaps most evident during the tenure of Arthur Levitt Jr., the longest-serving chairman of the commission, who oversaw a significant transition of the stock markets.
In a speech in 1999 in Boca Raton, Fla., before the Securities Industry Association, Wall Street’s largest trade group, Mr. Levitt sharply criticized a practice of Mr. Madoff’s firm of compensating financial institutions for directing trades toward the firm, a practice known as payment for order flow. Mr. Madoff also fought unsuccessfully against Mr. Levitt’s initiative to change the system of pricing stocks from one using fractions of a dollar to one using decimals, a change that wound up significantly reducing commissions and saving investors billions of dollars, but reduced profitability for firms like Mr. Madoff’s.
But Mr. Levitt, who served as chairman for all eight years of the Clinton administration, also occasionally turned to Mr. Madoff for advice about how the markets worked, and appointed him as a member of a large advisory commission that included a wide range of industry representatives that explored the rapidly changing structure of the financial markets.
“From my point of view, he understood the markets and we could ask him a question of how this worked and that worked and get a credible answer,” Mr. Levitt said in an interview on Wednesday. “But he also fought us tooth-and-nail on some issues, like the conversion to decimals.”
Mr. Levitt said he was unaware of the inquiries by commission staff members into Mr. Madoff’s firms during the 1990s. He disputed the notion that Mr. Madoff had any particular influence at the commission, or that the enforcement staff under him or any of his predecessors or successors would have been lulled into going lightly on Mr. Madoff because of his status as a prominent Wall Street executive.
Numbers Cruncher Says Madoff Math Didn't Add Up
19 Dec 2008
"Oh, geez" were the first words that ran through Daniel diBartolomeo's head when he heard that Bernard Madoff had been arrested.
"I hadn't thought of him in about 10 years," remembered diBartolomeo, who is paid to crunch numbers by pension funds and other professional investors.
DiBartolomeo had once been asked by a skeptical investor to run Madoff's numbers and failed to match the results.
Now he knows why.
Last week, prosecutors accused Madoff of running what could turn out to be the world's biggest Ponzi scheme, orchestrating a fraud that could run as high as $50 billion.
About 10 years ago, Harry Markopolos, then chief investment officer at Rampart Investment Management in Boston, asked diBartolomeo, president of Northfield Information Services outside of Boston, to run Madoff's numbers.
According to diBartolomeo, Markopolos told him that Rampart was pursuing the same strategy as Madoff, but Rampart's numbers were not as good as Madoff's, and Markopolos wanted to find out why.
"After spending about three hours playing around with regression analyses and various kinds of calculations, I could not reconcile it," diBartolomeo said in an interview.
"The problem with Madoff's strategy seemed to be that it did well all the time, no matter what," said diBartolomeo, who earned his bachelor of arts degree in applied physics from Cornell University. "And I concluded that something else was going on."
To diBartolomeo, this meant Madoff had shifted his investment style, which was perfectly legal, or was front-running his clients or making up the numbers, which were not legal.
Armed with his suspicions and diBartolomeo's data, Markopolos approached financial regulators several times about the matter, beginning in 1999.
Ignored or forgotten for nearly a decade by the U.S. Securities and Exchange Commission, Markopolos felt dejected, diBartolomeo remembered.
DiBartolomeo, who spoke to Markopolos this week, said his friend "now feels good that the matter finally came to light."
"He certainly deserves a prize for perseverance," diBartolomeo said.
Mr. Madoff told clients he was using a fairly common options-trading strategy to generate modest but steady returns for more than two decades. The strategy involved buying stocks, while also trading options -- which grant the right, but not the obligation, to buy or sell securities at pre-established prices in the future -- in a way designed to limit losses on the shares.
People who analyzed client statements said Mr. Madoff's firm couldn't have bought and sold the options he claimed because those totals would have outstripped total trading volume those days.
Some investment advisers steered clear of Madoff funds, in part because of discrepancies like these. "It seemed implausible that the S&P-100 options market that Madoff purported to trade could handle the size" of Madoff's estimated $13 billion in assets, wrote James Vos and Jake Walthour of advisory firm Aksia LLC last week in an explanation of why they didn't recommend funds that invested with Madoff to clients.
Other traders said that while the strategy, when properly used, does limit volatility, it generally wouldn't produce gains in a declining stock market. Account statements from Mr. Madoff's firm show small, steady gains each month, regardless of the market's direction.