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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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  • Market manipulation (Score:5, Interesting)

    by Anonymous Coward on Wednesday October 10, 2012 @05:24AM (#41605253)

    A single mysterious computer program that placed orders — and then subsequently canceled them
    The algorithm never executed a single trade

    No regulator should accept this.

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

    by Mitreya (579078) <(mitreya) (at) (gmail.com)> on Wednesday October 10, 2012 @05:35AM (#41605299)

    The game was interrupted when the boss arrived (what he called "first thing in the morning").

    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 - shaking up the stock market with minimal investment

    Something similar to penny stock spiking by spam...

  • Slashdot headlines (Score:3, Interesting)

    by ebonum (830686) on Wednesday October 10, 2012 @05:38AM (#41605313)

    How does "4% of Trading Activity Last Week" sync with "the algorithm never executed a single trade"?

  • by Therad (2493316) on Wednesday October 10, 2012 @05:38AM (#41605317)
    Don't worry, money don't have any value in todays socity anyway. We just print more. On a more serious note, every time they have run amok, they have rolled back the stock market to a stable point. So if you are a rich gambler and loses a lot of money you will be fine.
  • Re:Truth or dare... (Score:5, Interesting)

    by Anonymous Coward on Wednesday October 10, 2012 @05:39AM (#41605319)

    Try the article. This kind of gaming the system _does_ happen all the time. It's just this event seemed particularly large.

  • by udachny (2454394) on Wednesday October 10, 2012 @05:39AM (#41605321) Journal

    The real problem is that there is too much fake money that people do not personally feel attached to, because it's created by the main counterfeiters of the world - the central banks, and because starting a competing exchange is nearly impossible.

    How about this for a story [bloomberg.com]:

    In April, motivated by what I consider pure maliciousness, the SEC initiated a âoecease and desistâ administrative proceeding it deemed âoenecessary for the protection of investors and in the public interestâ against Egan-Jones Ratings Co., a privately owned, 20-person firm based in Haverford, Pennsylvania, and against its principal owner, Sean Egan.

    Do you know what the alleged crimes are?

    Here:

    Now, incredibly, Egan-Jones is the sole rater that the SEC has decided to attack. The trouble for the firm started on July 16, 2011, when Egan-Jones downgraded the U.S.â(TM)s sovereign debt by one notch, to AA+ from AAA. Egan-Jones cited âoethe relatively high level of debt and the difficulty in significantly cutting spending.â Two days later, the SECâ(TM)s Office of Compliance Inspections and Examinations contacted the firm seeking information about its rating decision. (The next month, S&P also downgraded the U.S.â(TM)s sovereign debt, but neither Moodyâ(TM)s nor Fitch did.)

    Then, on Oct. 12, Egan-Jones received a call from the SEC notifying the firm of a Wells Notice, an indication that it was being investigated. On April 5 of this year, Egan-Jones again downgraded the U.S. sovereign debt, to AA from AA+. On April 19, leaks started emanating from the SEC that it had voted to start an âoeadministrative law proceedingâ against the firm. And on April 24, the SEC filed its complaint.

    The crime is that this one agency is not paid by the sellers of the bonds but instead it's paid by the buyers of the bonds, and the buyers have an incentive to have debt rated properly, so that they know their risk.

    Of-course AFAIC US bonds are junk.

    So you think SEC is interested in really dealing with HFT and whatever you think is market manipulation?

    Think again, the only thing it is interested in is protecting the fake rating of the sovereign debt, so that the US gov't can keep piling it on.

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

    by Mitreya (579078) <(mitreya) (at) (gmail.com)> on Wednesday October 10, 2012 @05:53AM (#41605379)

    Try the article. This kind of gaming the system _does_ happen all the time. It's just this event seemed particularly large.

    Eh, no one reads the TFA -- I come here for the comments :)

    Of all the stock market defenders hyping the vital need for liquidity in the market, not one had ever mentioned that a significant fraction of that liquidity could be phantom trades.

    Does the article mention why the "fake" traders aren't fined and permanently banned from stock market? Stock market is not an anonymous place.

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

    by Mitreya (579078) <(mitreya) (at) (gmail.com)> on Wednesday October 10, 2012 @06:01AM (#41605411)

    The article indicates that there were no trades at all, just large numbers of orders.

    I misspoke. Not "orders", but "activity". Still, this activity is clearly visible and accessible to players thus potentially gaming the market.

    Why would anyone on the market need to know the "activity" before it actually happens? Are those the HFT traders watching the transactions before they occur, hoping to skim some profit off the top? Could it be that a new kind of market predator had evolved and the newcomers are now trying to game the HFT traders?

  • by AVee (557523) <slashdot&avee,org> on Wednesday October 10, 2012 @06:58AM (#41605615) Homepage
    Automated trading shouldn't be accepted by regulators anyway. It probably is a nice game to play, but at the end of the day it takes money without giving anything back in return. Most other ways of making money without doing something useful are called theft or fraud. All those 'schemes' to become richer without actually adding any value is pretty bad for an economy (and essentially just theft, however fancy).
  • Re:Truth or dare... (Score:5, Interesting)

    by aurizon (122550) <bill.jackson@gEU ... m minus math_god> on Wednesday October 10, 2012 @07:02AM (#41605631)

    This is market judo, push the opponent, measure the response, feint again, and again until you assess the defense - in this case the various times constants of responses, how the market falls and rises with these assorted feints (false trades) and then you attack, force an arbitrage gap and execute two counter trades and grab the arbitrage difference - repeat many many times.

    I think this is what is going on with this high speed trading

  • Re:Testing (Score:4, Interesting)

    by MachineShedFred (621896) on Wednesday October 10, 2012 @07:13AM (#41605701) Journal

    I was going to post the obligatory Skynet comment, but you beat me to it.

    Instead, I'll expand by theorizing that Skynet wouldn't even need to have launch control of nuclear missiles itself if it just collapsed the economies of the first world - we'd get about blaming China soon enough, China would probably decide that they've had enough of Taiwan's bullshit and fire a missile or two across the water at them, drawing us into a quickly escalating war which sees us firing missiles at them, China firing back, and Russia getting in on the fun as well as NATO.

    All because some dick at Goldman Sachs wanted to make a few basis points more profit by hacking together someone's AI research with a stock trading flavor.

  • HFT needs fees (Score:5, Interesting)

    by bradley13 (1118935) on Wednesday October 10, 2012 @07:15AM (#41605711) Homepage

    Much as I dislike adding fees to inhibit the free market, the whole HFT world desperately needs them. Placing any bid or making any transaction should cost some small-but-tangible amount of money.

    Even better, if more complex: add a fee based on how long a particular security is held. Less than a second, the fee is 1000% of the transaction value, more than a year, no fee at all, and scale for all values in the middle. HFT is legalized theft, and needs to be penalized out of existence.

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

    by DarkOx (621550) on Wednesday October 10, 2012 @07:16AM (#41605719) Journal

    Nobody has made a compelling case that HFT has any real net impact on retail investors or anyone making an IPO or issuance. Look to my other post in this discussion but by and large HFT is just Wall Street Banks pirating from each other.

    The liquidity argument aside, the HFT guys are the ones who drove the technology that has enable you and I to trade online for low fixed prices, rather than the bad old days where you had to find a broker who would bother with you in the first place and then put up with his 3+% commission.

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

    by Required Snark (1702878) on Wednesday October 10, 2012 @07:40AM (#41605835)
    These are not mutually exclusive effects. One could argue that the "wealth" extracted from the stock market by algorithmic trading/casino capitalism is effectively draining real wealth from the small investors (suckers). The end point of this process is a investment environment where the insiders have so much capital that the illusion of a functioning investment environment collapses. Anyone else attempting to invest will only have access to the equivalent of penny stocks.

    If you look at the investment career of the plutocratic candidate Romney you can see how far this transformation has already gone. A lot of his $250 Billion (or more) was acquired (i.e. stolen) from Bane investors. The deals were always structured so that Bain insiders would come out ahead, no matter what the outcome: win, loose or draw.

    What is called capitalism in the West is close to the way the Mafia used to work after WWII. You joint a crew associated with an insider and you get a license to steal. You pay for the privilege of stealing by kicking money to the bosses. In the current setup the insiders support outfits like the American Enterprise Institute and the Chamber of Commerce which influence government to legalize theft.

    A current example: Wallmart is in huge scandal right now with bribery in Mexico.

    http://www.forbes.com/sites/adamhartung/2012/04/26/walmarts-mexican-bribery-scandal-will-sink-it-like-the-icerberg-sank-the-titanic/ [forbes.com]

    It came to light that after paying the bribes WalMart’s leadership team did about everything it could to cover them up. Including spending millions on lobbying efforts to hopefully change the laws before anyone was caught, and possibly prosecuted. The goal was to keep the stores open, and open more. If that meant a little bribing went on, then it was best to not let people know. And instead of saying what WalMart did was wrong, change the rules so it doesn’t look like it was wrong.

    The US Chamber of Commerce was the vehicle for their attempt to change the law to make bribery legal.

    http://www.washingtonpost.com/business/economy/wal-mart-took-part-in-lobbying-campaign-to-amend-anti-bribery-law/2012/04/24/gIQAyZcdfT_story.html [washingtonpost.com]

    The push to revisit how federal authorities enforce the statute has been centered at a little-known but well-funded arm of the U.S. Chamber of Commerce where a top executive of Wal-Mart has sat on the board of directors for nearly a decade.

    The effort has intensified in the past two years, drawing on the backing of several large companies and trade groups such as the Retail Industry Leaders Association, where one of Wal-Mart’s top executives serves as a director. It also has involved high-powered lobbyists, including former attorney general Michael B. Mukasey.

    There is no evidence that suggests Wal-Mart participated in the Chamber’s efforts because of its problems in Mexico. (Emphasis added.)

    If you believe that last line you also should believe in the tooth fairy.

  • Quote Stuffing (Score:5, Interesting)

    by kill-1 (36256) on Wednesday October 10, 2012 @07:44AM (#41605857)

    Where's the news? This is called quote stuffing and has been going on for ages. The reason is simply to mislead or overwhelm the HFT algos of competitors.

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

    by Anonymous Coward on Wednesday October 10, 2012 @07:47AM (#41605869)

    Stock trading is a zero sum game, in which two people exchange goods of notionally identical value.

    The stock market is not a zero sum game, but a proxy for most of the economic activity on the planet. ie: put $100 of capital into a company today, let them add some labor, create real goods and services that didn't exist yesterday, and the company can give you back your capital and a share of that newly created product. The apparent failure to understand that fundamental nature of the stock market is why HFT is so despised by investors.

  • cancel (Score:4, Interesting)

    by Tom (822) on Wednesday October 10, 2012 @08:08AM (#41605977) Homepage Journal

    Ok, it's been a few years since I worked at the stock exchange, so someone please update me:

    What is this bullshit with cancelling orders, in bulk? What is the reasoning, how could anyone ever think that would be a good idea to allow?

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

    by ax_42 (470562) on Wednesday October 10, 2012 @08:35AM (#41606123)

    Nobody has made a compelling case that HFT has any real net impact on retail investors or anyone making an IPO or issuance. Look to my other post in this discussion but by and large HFT is just Wall Street Banks pirating from each other.

    Bullshit. They skim the difference between what someone would be prepared to sell for and what someone is prepared to pay (ie an investor may be prepared to pay 1.25 for a share, but you are offering to sell for 1.20 -- instead of the investor paying only 1.20, the HFT jumps in, buys for 1.20 and sells for 1.25, pocketing the difference). This is not just HFTs screwing each other, it screws the normal investor (which includes, you know, funds investing your pension money).

    The liquidity argument aside, the HFT guys are the ones who drove the technology that has enable you and I to trade online for low fixed prices, rather than the bad old days where you had to find a broker who would bother with you in the first place and then put up with his 3+% commission.

    More bullshit (seriously, do you have a cattle farm?). You correctly describe the bad old days, but those ended in the 1990s, and are dealt with by having competition between brokers/online quote platforms. HFT sucks up the capacity of the trading systems to be able to deal with the frequency of trade, to absolutely no-one's benefit but their own (or do you really think a retail/corporate investor cares whether their trade executes a microsecond faster -- they care that they are not getting screwed by the marketplace).

    And to answer the "why don't they put a stop to this" question -- the stock exchanges like having large number of quotes, as they charge for trades, so the more the better. They are acting in the interests of their own shareholders, to make money, and not in the interests of the participants of the market (who want a fair market).

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

    by aliquis (678370) <dospam@gmail.com> on Wednesday October 10, 2012 @08:56AM (#41606311) Homepage

    It's not liquidity if you can't trade with it.

    Though I assume that if you threw in an order of a billion (oh well..) shares at 100 dollar higher than the current price of Apple maybe you'd get some from them.

    It just take a simple look at the volume charts to see that the volume of the markets are falling and have been for a long time:
    http://stockcharts.com/h-sc/ui?s=$SPX [stockcharts.com]

    Change to weekly.

    Over here in Sweden we've got multiple exchanges and then I suppose one should get the numbers for all of them.

    The reason they aren't banned is likely because it's not illegal :), or hard to prove what the intention was.

    And you can be rather anonymous by trading through an insurrance.

    Make it so an order can't be cancelled within the first hour and watch the change.

    Also when these algoritms screw up they managed to get the trades cancelled. When a regular person is fooled by them and screw up.. Well. Good luck! (They are likely cancelled due to the effect they had at price and trades in general rather than compensation but it's still a safety network and protect the losses of the big players but the smaller ones just got to accept the fact.)

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

    by greg1104 (461138) <gsmith@gregsmith.com> on Wednesday October 10, 2012 @09:23AM (#41606565) Homepage

    The bidding on the stock I was trading was moved up to benefit a company executive who was selling a block that day. Good luck getting the SEC to cancel trades due to simple forms of insider manipulation on that small of a scale. They're massively understaffed for that, and ineffective at most jobs they claim to be doing. Eventually the stock price went to 0 because this sort of crap put the company out of business, so in the end it all worked out fine.

    I don't think executing a simple short transaction on a single stock that seems headed down is beyond the "typical retail investor". It's not like I had some crazy naked short or an options position here. Knowing how to use a stop loss order is not exactly trading rocket science either. This is all "Trading for Dummies" territory.

  • by olau (314197) on Wednesday October 10, 2012 @09:28AM (#41606599) Homepage

    I read the other day that the EU Parliament is considering adding a 0.5 second minimum order duration limit to the relevant directive (MiFID) to ensure that other parties can actually close the orders and prevent this kind of thing from happening.

  • Re:Truth or dare... (Score:2, Interesting)

    by V-similitude (2186590) on Wednesday October 10, 2012 @09:54AM (#41606837)

    Boy do you not understand stock exchanges. Basically none of what you said it accurate. HFT's don't suck up the difference between the bid and ask, that's the exchange's job. If HFT's did though, all they'd be doing is taking money from the exchange NOT from investors. High volume is GOOD for investors. Your hypothetical is just wrong; there's no situation where the investor pays 1.20, unless they go outside the market and settle with the seller directly (even then, negotiations will tend to end in the middle at 1.225). Really, in a low volume (normal) situation, the investor pays 1.25, and the buyer gets 1.20, and the exchange or broker gets the spread. Add in extra volume (perhaps from HFT's, but not really), and the spread shrinks, and the investor then pays 1.24 maybe, and the buyer gets 1.21 (good for both), while the high volume traders soak up some of the difference, and the exchange/broker probably still gets some part of that as well.

    Really though, the problem with HFT's is that they do nothing of the sort. They muck around making microsecond trades and bids and offers, which just screw with the market in unpredictable ways. They make money by micromovements of the market, not by skimming the spread.

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

    by TubeSteak (669689) on Wednesday October 10, 2012 @11:38AM (#41608155) Journal

    Nobody has made a compelling case that HFT has any real net impact on retail investors or anyone making an IPO or issuance.

    Maybe nobody you've read. There have been plenty of articles and papers walking even the dumbest person through the negative side effects of high frequency trading.

    As for IPOs, someone created a visualization of trades for the first day of Facebook's IPO and points out where the HFTs show up and
    start arbitraging enormous volumes of stock right around the $38 price floor that was being defended by Morgan Stanley (lead underwriter).
    Here is the video: https://www.youtube.com/watch?v=KrkH_WQxxEA [youtube.com]

    Look to my other post in this discussion [...]

    As the HFTs have shown us, high volume != right.

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

    by SlippyToad (240532) on Wednesday October 10, 2012 @12:13PM (#41608657)

    It is transfer but its really only transfer between Wall Street Entities. There is a great deal of hand ringing about HFT but I don't see much evidence it does anything to your typical retail investor.

    The fact that this horseshit goes on, is one reason I'll never invest in the stock market. I'd just as soon take my paycheck and sign it over to a Las Vegas casino.

    So, that's an influence.

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