CNBC's Easy Money

(page 2 of 3)

The top traders are reluctant to discuss their performance. Four of the top five performers declined to discuss their trading in detail with BusinessWeek, and the fifth could not be located for comment. "I don't want to jeopardize anything by saying something stupid," says Joe Dondero, who was fourth in the standings on the last day for which results have been made public.

How could traders exploit CNBC's glitch? According to several participants, the technique was relatively simple, but not obvious to all participants. A trader could go to the CNBC Web site and select a number of stocks to buy, but hold off on executing those trades. If you made the selection before the close of regular trading at 4 p.m. EST and left your Web browser open, you could execute those trades after hours and still receive the 4 p.m. closing price. For example, if a company whose stock closed at $20 a share rose to $25 in after-hours trading, you could buy the stock at $20, even though it was already worth 25% more (see BusinessWeek.com, 6/8/07, Slide Show: "How to Game CNBC's Stocks Contest").

The allegation is that certain traders may have used the technique with companies that were reporting earnings and other important news after the market's close. They could select as many as 50 stocks and then execute trades for only the one or two best performers.

Serge Amelyan, a real estate investor from Mequon, Wis., was one of the 20 finalists with prescient trades. On the first day of the final round, he placed a big bet on Mindray Medical International (MR), which was reporting earnings that afternoon. Amelyan cashed in as the stock rose 7% in after-hours trading, more than any other stock with a late earnings announcement. The very next day, he invested heavily in Compuware (CPWR), which again reported strong earnings and surged 7%. In all, seven of the nine stocks Amelyan invested in during the finals announced earnings after the markets closed. Six of those saw sharp increases, while one had a slight decline. Amelyan says he didn't use any unusual trading practices. "I didn't play that way," he says.

From Pharmaceuticals to Finance

Kraber, the player who helped uncover the CNBC contest's possible flaw, grew up in Dixon, Ill., about 100 miles west of Chicago. He majored in chemical engineering at the University of Illinois, where he says he began to develop an interest in the markets. But when he graduated in 1989, he found he didn't have the stomach for the risk he saw in a career trading. Instead, he took work in the pharmaceutical industry and moved to New York.

Kraber's interest in finance remained strong, however. So after five years working for Merck (MRK) and Schering-Plough (SGP), he decided to pursue an MBA in finance at New York University and then followed that with a master's in statistics. He says his three degrees have quite a bit in common: The knowledge needed to analyze heat transfer and, say, trade complex derivatives are closely connected, maintains Kraber. "I see it all as very much related," he says. He now trades for his own account and does market risk analysis for others on an ad hoc basis.

When Kraber heard about CNBC's million-dollar challenge earlier this year, he knew he wanted to enter. But it wasn't until he read the rules of the game that he figured he had a pretty good shot at making the finals. The key was that CNBC put no limit on the number of portfolios a player could manage, and only the best-performing one would count. So Kraber, with his expertise in statistics, computer-programming, and stock selection, could set up hundreds of different portfolios, all pursuing high-risk, high-return strategies.