For what is essentially the American Idol of stock picking, CNBC’s “Million Dollar Portfolio Challenge” had a trader with a stream of near-perfect picks, consistently placing huge bets on shares that soared in after-hours trading. In the past few months, Jim Kraber, who became more than a little obsessed with the challenge, stated, “I went back and looked at his trades and thought, ‘This is pretty much statistically impossible’.”
Several contest participants have told BusinessWeek that there was a flaw in the design of the CNBC game that allowed certain players an unfair advantage. As many as four of the top contestants in the million dollar contest may have exploited the flaw, according to the participants interviewed by BusinessWeek.
A million dollars is on the line for the ultimate winner of the contest, along with fame and future opportunity. CNBC, which bills itself as the essential news channel for investors and businesspeople, has a reputation to protect. CNBC may have to publicly acknowledge mismanagement of the contest and could face potential lawsuits from disgruntled participants.
“I figured out very quickly what was going on and they were looking at all the trades,” says Kraber. “It is not negligence that they might have made bad software. It is negligence if they knew this was going on and did nothing to stop it.”
Over the first nine trading days of the final round, the top five stock pickers tallied average returns of 45%. If that kind of performance was stretched out over a year, it would work out to an annual return of more than 1,200%. 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. Take a look at a slide show on how some participants believe the loophole may have worked.
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(source: SmallCapMarketWatch.com)
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