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Mysterious Algorithm Was 4% of Trading Activity Last Week 617

Posted by Soulskill
from the robot-overlords-doing-a-test-run dept.
concealment sends this excerpt from CNBC: "A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity. The motive of the algorithm is still unclear. The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday."
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Mysterious Algorithm Was 4% of Trading Activity Last Week

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  • by Spad (470073) <slashdot @ s p a d . c o.uk> on Wednesday October 10, 2012 @05:45AM (#41605351) Homepage

    "Trading Activity" isn't the same as executing a trade; it was running loops of "I want to buy this share...actually I changed my mind", seemingly in the hope of introducing additional latency into the system and giving an advantage to those traders with on-site trading hardware.

  • Re:Truth or dare... (Score:5, Informative)

    by alphatel (1450715) on Wednesday October 10, 2012 @06:07AM (#41605435)

    Something similar to penny stock spiking by spam...

    Continued unregulated algorithmic trading can have only two effects: 1) someone will get rich at everyone else's expense; 2) the NYSE will become the penny stock market.

  • by Forget4it (530598) on Wednesday October 10, 2012 @06:14AM (#41605471) Homepage
    Felix Salmon on high-frequency trading and its part in the current financial crisis.
    Listen to this 13 min BBC programme/essay at: http://www.bbc.co.uk/programmes/b01n1thw [bbc.co.uk] available for the next 12 months
  • Re:Truth or dare... (Score:3, Informative)

    by icebraining (1313345) on Wednesday October 10, 2012 @06:16AM (#41605475) Homepage

    If anything, it's a transfer from the other players in the market, not "printing" money, so how are they not concerned about it? Most market players aren't HFTs.

  • Re:Truth or dare... (Score:5, Informative)

    by Anonymous Coward on Wednesday October 10, 2012 @06:17AM (#41605481)

    It may not affect the prices directly. However it might affect the prices indirectly, by influencing the decision making of others (especially other algorithms).

  • by sifi (170630) on Wednesday October 10, 2012 @06:33AM (#41605525)
    Of course the exchange knows who they are - you can't just stuff orders into the market anonymously from your PC at home. I'm mean the exchange needs to know who you are so they know who to charge for the trades. The exchanges aren't happy about people placing and cancelling tonnes of orders - after all they only make money when something trades. You can guarantee that they got on the phone to whom ever was doing this and asked them to stop.
  • Re:Truth or dare... (Score:4, Informative)

    by rvw (755107) on Wednesday October 10, 2012 @06:50AM (#41605587)

    It may not affect the prices directly. However it might affect the prices indirectly, by influencing the decision making of others (especially other algorithms).

    And although slight, it might slow down the system. Maybe 4% will not result in a noticable change, but could it slow the system down enough to give someone an advantage? Just thinking out loud here! This effect might however be a lot bigger for the broker that made these trades. And in that case it could mean that someone on the inside of that tradehouse would have had an advantage if that happened. Yeah I know, that's pure speculation.

  • Re:Truth or dare... (Score:3, Informative)

    by Neil Boekend (1854906) on Wednesday October 10, 2012 @07:05AM (#41605649)
    Yes, but the low and high orders can influence the market before they are recalled, since they are open. HFT algorithms base decisions on those orders.
  • by bradley13 (1118935) on Wednesday October 10, 2012 @07:11AM (#41605683) Homepage

    The US Savings bonds remain the safest bonds in the world. They're also the only bonds worth buying. * * * There's still plenty of funds available to service the debt.

    First, while there are too few of them, there are a number of countries in the world without debt problems. The US is one of the countries that is worst off [chartsbin.com], especially if you add in all of the unfunded pension liabilities (which the government generally avoids). Any country colored green, yellow or even orange in that map has its debt under control. Cross-reference for a trustworthy government, and you still have quite a selection of countries whose bonds are a much better choice than US Savings Bonds.

    The only source of "funds" to pay off this massive debt are called "printing presses". While printing more money is, in fact, probably what will eventually happen, this will destroy private saving, cause massive inflation, and completely undermine the position of the dollar in the international markets.

    tldr; The US is not the whole world. Have a look around, much of the rest of the world is doing a lot better than the US nowadays...

  • Re:Truth or dare... (Score:5, Informative)

    by choprboy (155926) on Wednesday October 10, 2012 @07:13AM (#41605695) Homepage

    So it is possible to create a large volume of "trades" without actually ever buying or selling anything? I am surprised that isn't gamed on regular basis

    It is and this is the basis of high frequency trading... though on Wallstreet they call it "providing liquidity". It works like this:

    Alice wants to sell 1000 shares of Acme Corp. She places an sell order for 1000 shares at $25.00 on the exchange, but she also places a minimum bid of $23.90 on the sell order. This minimum bid what Alice is willing to accept should someone counter-offer but is suppose to be secret, only the sell price will be published.

    Bob is looking for 1000 shares of Acme Corp. He wants to place it in his portfolio for long-term growth, but he thinks it is currently worth less. Bob places a general buy order at $24.40 on the exchange. For the sake of simplicity we will say that is his only price, though he too could have a maximum bid he is will to pay.

    So there is a sell order at $25.00 and a buy order at $24.40 pending on the exchange, nothing trades. Now Bob could make a buy offer to Alice at $24.40 and the trade would go thru, or Alice could make a sell offer to Bob at a lower price and follow thru. In a perfect world the exchange would figure it out and match the orders... but that doesn't happen without further action on the part of Alice or Bob.

    Eve is a high frequency trader... Actually, Eve is a high frequency trading program at MegaTraders LLC. and has spotted that there are buy and sell orders for Acme Corp on the exchange. Eve places a bid at $24.99 for Alice's share, the exchange accepts, and then Eve immediately cancels the bid order. Eve has just learned that Alice is will to sell for less than the sell order posted. Eve then continues placing bids on Alice's stock, $24.98, $24.97, $24.96, etc., each time immediately canceling the buy when the exchange accepts the bid. Eve gets down to $23.89, at which point the exchange does not accept the bid for Alice's stock. Eve has just learned that Alice is willing to sell for as little as $23.90 and all of this has happened within 10s of milliseconds.

    Remember all those articles on Slashdot about high frequency firm X laying their own fiber directly to the exchange to cut milliseconds off transit time? Having custom L2 firmware on their switches and no firewalls on their trading links to cut milliseconds off transit time? This is why they do it, so they can submit hundreds/thousands of buy/sell/cancel orders on a single stock within a fraction of a second to learn pricing differences between orders that otherwise should be secret.

    So Eve now knows that Alice is will to sell for $23.90 and would perform the same procedure against Bob to discover his highest buy price. Once found Eve can now see a price difference advantages to herself. Eve buys the 1000 shares from Alice at $23.90 and then immediately sells the shares to Bob at $24.40, pocketing the $500 difference. On Wallstreet they call this "providing liquidity", anywhere else this would be considered insider trading and illegal. Multiple all this by several hundred firms with special inside access to the market place, each running their own competing Eve programs, and you quickly realize how the market can go into turmoil within seconds....

  • Re:Truth or dare... (Score:4, Informative)

    by gl4ss (559668) on Wednesday October 10, 2012 @07:21AM (#41605731) Homepage Journal

    You can bid ridiculously low prices, or ask ridiculously high prices, and no trades will be made, but this won't affect the stock prices. Stock prices are set based on trades that do occur. It's like selling a house - some bozo can offer you half what it's worth, but the net effect on the house price statistics for your area is precisely zero.

    the idea is to flood the system - to increase ping to other people.

    it's ridiculous that there's no rules against flooding it with millions of trades you have no intention of ever executing.

  • by martin-boundary (547041) on Wednesday October 10, 2012 @07:47AM (#41605867)
    [pro-hft trolling] [slashdot.org]
  • Re:Truth or dare... (Score:5, Informative)

    by choprboy (155926) on Wednesday October 10, 2012 @08:07AM (#41605969) Homepage

    A few questions:


    • - Why are you allowed to cancel orders ? At an auction you owe the money once you've raised your hand.
      - Why isn't there a fine on traders who happen to cancel more than X% of their orders ? X being in the order of 1.
      - Why aren't transactions or even 'reservations' (which is what a canceled order looks like to me) taxed ?

    Just to be clear... The above is a grossly oversimplified example of HFT. Thanks to the new world of online trading, an order isn;t really processed until both sides have confirmed the order. In the old days with a hundred guys in a trading pit, someone offering to buy at $150,000/share would obviously be wrong. Mistyping the same in an electronic order that autocompleted could have disastrous consequences, so there has to be a way to cancel a request. Why aren;t there fines or taxes? Well ask NASDAQ/etc.

    In the real world the above is happening on trades with a difference of a fraction of a cent. In many cases it may be that Bob has a buy order at $25.01 and Alice has a sell order at $25.00. Eve has millisecond timing and can simply enter the orders faster than any human trader could possibly react. Eve is also taking in every market fluctuation and stock move the virtual instant it happens... meaning a well built Eve can anticipate the bounces in a stock price based on buys/sells and just announced news, before a human could recognize that news. But at the end of the trading day, Eve has no position in the market. Eve has only served to suck money out of the market by acting as an (unwanted) intermediary.

  • Re:Truth or dare... (Score:5, Informative)

    by Knuckles (8964) <`gro.naitnad' `ta' `selkcunk'> on Wednesday October 10, 2012 @08:12AM (#41605989)

    And although slight, it might slow down the system. Maybe 4% will not result in a noticable change, but could it slow the system down enough to give someone an advantage? (..) Yeah I know, that's pure speculation.

    That's exactly what I read in some article [cnbc.com] might be the point:

    “My guess is that the algo was testing the market, as high-frequency frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency.” (Read More: Unclear What Caused Kraft Spike: Nanex Founder.)

    Translation: The ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity.

  • Liquidity (Score:5, Informative)

    by sjbe (173966) on Wednesday October 10, 2012 @08:28AM (#41606085)

    If it's advantageous to sell, you sell and make money, there's your liquidity

    That is most definitely not liquidity. Just because you want to sell something doesn't mean there is a buyer. Or it might mean there is a buyer but they want a big premium to do the deal. Liquidity is a measure of the ease with which buyers and sellers can find each other and agree to a price. Our recent financial crisis was in large part a crisis of liquidity. Big banks needed to be able to borrow money and everyone was afraid of lending to someone who might be insolvent so there was literally nowhere to borrow from. It's not just an all or nothing proposition either. If a stock is thinly traded, the spreads are going to be huge and it will be really expensive to buy that stock. If it is difficult to find sellers it likely will be difficult to find future buyers as well. The more trading that occurs in a stock, the narrower the bid/ask spreads because it is easier (and less expensive) for buyers and sellers to find each other. More trading = more liquitity = lower transaction costs.

  • Re:Truth or dare... (Score:5, Informative)

    by greg1104 (461138) <gsmith@gregsmith.com> on Wednesday October 10, 2012 @08:32AM (#41606107) Homepage

    I've had illegal manipulation of a stock I was shorting result in a margin call against my account. There was no opportunity to "wait a day" for the mess to subside; part of my position was closed at the manipulated price by my broker. I've also had a stop loss order triggered by someone pushing the price around with that as its intended effect, a few seconds before the close proceeding a positive earnings announcement.

    The idea that an individual investor will survive a crash long enough for the volatility to end without damage is a very optimistic one. Position entry isn't the problem; yes, you use a limit orders, etc. The problems are on the exit side. Forced closing before the return to normal conditions and making safety stop loss orders impossible to use that just two of the many ways individual investors can get hammered by temporary price manipulation.

  • Re:Truth or dare... (Score:1, Informative)

    by tolkienfan (892463) on Wednesday October 10, 2012 @09:10AM (#41606445) Journal

    HFT operates completely withing all relevant rules and regulations.
    In fact, I've seen fines in the millions for non-compliance. If it continued the company would be expelled from the exchange.

    Few here really understand what HFT is.

    It's very simple: HFT uses strategies that traders have used for years, such as market making and arbitrage, but just use technology to do it more efficiently.

    It's simply that competition has driven down the latencies and the costs.

    I've read about 12 studies now. A few of them have found some bad behaviors, but they all conclude the HFT is overall beneficial to the market as a whole. It makes it much more efficient - and dissipates risk very quickly.

  • Re:Truth or dare... (Score:4, Informative)

    by greg1104 (461138) <gsmith@gregsmith.com> on Wednesday October 10, 2012 @11:48AM (#41608277) Homepage

    Here's a proper worked out example, I was sloppy before. The easiest way to get a margin call without trading on margin is to run into the minimum requirements to maintain an account. Open an account at Interactive Brokers (using them simply because that's where my last margin call came from) using $2500. Buy 25 shares of a stock at $100/share. Maintenance margin [interactivebrokers.com] is $2000 on this position, you have slightly under $2500 (transaction fees) to cover it.

    There's a crash in that stock and the price closes at $75/share one day. Your account now is worth $1875, but the maintenance margin is still $2000. The broker can now liquidate some of that position at $75/share via margin call unless you deposit more money. Let's say you don't respond to that in time. Even if the recovers to its original price of $100 per share, your account won't be back to $2500. You'll have sold some shares at the bottom instead.

    This example is admittedly a bit forced, but even the simplest long position can hit this sort of margin call in the face of a large enough artificial price crash. The maintenance minimums can change on you after a transaction is made too. Normally they only drop from what it takes to execute a trade in the first place, but there are edge cases that can kill you. Let's say you open an account with $20,000 and make $10,000 of long trades. One day you make some new trades just as the market turns sour, so you immediately sell them. Make too many trades in a short period, and you can suddenly be a Pattern day trader [wikipedia.org]. Your minimum account number goes up to $25,000, and you can face a margin call potentially forcing a bad liquidation trade as part of that, again without having ever traded on margin directly. I did that once, too, and it's no fun to resolve. That rule you can avoid if you open a strictly cash account, without even the possibility of margin.

  • Re:Truth or dare... (Score:4, Informative)

    by Luckyo (1726890) on Wednesday October 10, 2012 @01:26PM (#41609653)

    Problem is that "players" aren't actually the main deciding factor in how trade rules are made. They are an important one, but not major. Major factors are interests of exchanges themselves who benefit from HFT financially and major traders who run HFTs.

    This leaves the small and medium traders who are basically exploited.

  • Re:Truth or dare... (Score:5, Informative)

    by DavidTC (10147) <slas45dxsvadiv D ... neverbox DOT com> on Wednesday October 10, 2012 @06:06PM (#41613311) Homepage

    Indeed.

    STOCK PRICES SHOULD NOT CHANGE FROM DAY TO DAY.

    The entire damn premise of the stock market is _supposed_ to be 'I would like to own a piece of this company because I think this company will turn a profit and pay me a dividend'. People should buy or sell stock based on how that. This means that stock prices should be how much people believe it's quarterly reports, combined obvious market changers like a plant fire or a new CEO or a competitor coming out with a better product or something, which might rationally cause you to reevaluate that.

    There is absolutely no reason for anyone to buy stock and sell it in less than a month.

    Instead, we have a goddamn casino. A _literal_ casino that has no bearing at all on how well companies actually do, because something like half the investors aren't there to try to get profit from companies, but to get profit from the reselling the stocks!

    If I could magically restructure the way this works, I would set it up where all trades get executed at 12:01 Sunday morning. And dividends go out immediately after that for the previous week's owners. (Not that there will always be dividends, but if they exist, they should be evenly divided between weeks instead of them being saved up for each month or quarter or whatever.)

    That's it. A weekly cycle. Buy it Sunday morning, wait a week, check Saturday evening what the dividends will be (Technically you only have six and a half days information, but that should be enough.), decide to keep it or not, decide who else you think will make money, and repeat. The question should be 'Do I think this company will make money next week?'.

    Yes, obviously stock prices will change also, but that should not be the goal of anyone to really make money that way. And handing out profits as dividends instead of holding on to them will stop the constant inflation of stock prices.

    Stock needs to return to meaning 'owning part of a corporation'.

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