Two Sigma quantitative researcher indicted for manipulating algorithmic models
A quantitative researcher at Two Sigma Investments was indicted for wire fraud, securities fraud and money laundering after allegedly manipulating algorithmic trading models to inflate his compensation and cause approximately $170 million in losses to clients. The researcher, Jian Wu, created models designed to circumvent the firm's validation controls and made unauthorized modifications to make them appear more profitable, generating personal compensation of $23.5 million in 2022.
What happened
Jian Wu, 34, a Chinese citizen employed at Two Sigma Investments, created or helped create 14 algorithmic trading models that circumvented the firm's requirement that new models generate unique predictions complementing rather than duplicating existing predictions. Between November 2021 and August 2023, Wu designed models that were approved and released, then made unauthorized changes to their parameters that 'significantly altered' their behavior to appear more high-performing.
Reported impact
Two Sigma told investors in October 2023 that an employee caused approximately $170 million in losses to its clients by manipulating investment models. Wu's compensation was inflated to $23.5 million in 2022, in part through $8 million in performance grants and $17.8 million in cash bonuses. Two Sigma repaid clients for losses and fired Wu in 2024 after six years of employment.
Index analysis
Wu created models that circumvented Two Sigma's model validation controls by appearing to generate unique predictions when they actually duplicated existing ones. Employees noticed higher-than-expected correlations between Wu's models and other models in 2023, prompting an investigation that revealed Wu had made additional unauthorized changes to conceal his prior activity.
Governance controls
Two Sigma's controls required that new models generate unique predictions complementary to existing ones, but Wu circumvented this requirement. Wu made unauthorized modifications to approved models, and the SEC later said Two Sigma waited four years to address the issue after detecting anomalies in 2023.
Classification
Sources and evidence
This record was researched and written by the Index, based on the following original reporting.