Mysterious Algorithm Was 4% of Trading Activity Last Week 617
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."
Testing (Score:4, Insightful)
Perhaps somebody was running some unit test on production here?
I think we are taking significant risks (Score:5, Insightful)
Unclear? Really? (Score:5, Insightful)
"The motive of the algorithm is still unclear."
Oh what a load of bullshit.
It's obviously an experiment in painting the tape. Make bids, cancel them. Walk stocks up and down with the bid price. Head-fake other HFT corps that track bid prices in their algorithms.
It went badly because it was detected. It needs tweaking to be not so obvious next time. And yes, there will be a next time.
It's a casino now. It's been a casino for a while, and if you're not part of the house, you're the mark.
--
BMO
And THIS is the heart of our financial system... (Score:5, Insightful)
Guys, think of it. Our stock exchange, i.e. your pension or if you are unlucky also your mortgage is depending on this kind of software these days... And this is not the first time this year that stock trading software is in the news. This has nothing to do anymore with owning a share of an organization in the hope the organization will make a profit and pay you dividend. This is total craziness.
Re:Truth or dare... (Score:5, Insightful)
It is allowed. They operate within the rules.
Considering it's basically a license to print money, nobody is particularly concerned with "fixing" the problem. That's why you see all this astroturfing bullshit about how good HFT is -- it is all they really have to delay public opinion turning against them.
A couple of questions (Score:4, Insightful)
1) If I were to do something like this with amazon.com (add things in my shopping cart and then remove them rapidly) wouldn't the headline be "hacker attempts to take down amazon site" with jail time? Why does this receive such a neutral headline like "mysterious algorithm?"
2) I pay $25 to execute a trade. How much money does it cost these people to put a bid or ask up and pull it? Shouldn't there be some sort of punitive cost for doing this?
Identification? (Score:5, Insightful)
Re:Market manipulation (Score:5, Insightful)
Kinda puts a spotlight on who is in bed with whom doesn't it?
Re:And THIS is the heart of our financial system.. (Score:2, Insightful)
Let's make few thinks clear:
- Condensation trials left by airliners are not chemicals spread by the government,
- Elvis is dead,
- High Frequency Trading does not influence long term security values.
Re:Truth or dare... (Score:5, Insightful)
No, HFTs certainly skim off the top of genuine traders and investors. If they were just transferring money from each other, the practice would never have become so pervasive.
They do it by spending millions on computers, programmers, interconnects, and physical proximity and connectivity to exchanges. This gives them a fundamental and practically (for a small time player) unbeatable advantage over other users of the system, which is utterly against the spirit of a free market.
What they are doing is consuming the service to the detriment of other users, and extracting a tax with their unfair advantage over other users, while contributing exactly nothing back.
Re:Testing (Score:5, Insightful)
Or Skynet is gradually acquiring conscience
Conscience: an aptitude, faculty, intuition or judgment of the intellect that distinguishes right from wrong
Consciousness: the quality or state of being aware of an external object or something within oneself.
If SkyNET developed a conscience, it would cancel third world debt and cut spending from pork-barrel programs, and would also be vegetarian.
Just FYI; It's an important distinction. No need to mod.
Re:I think we are taking significant risks (Score:4, Insightful)
And these days that's practically *everybody*. In all major advanced countries, pension funds are linked to the stock market. So when a crash happens as it did a few years ago, people lose many years of their pension money, causing misery, longer working lives, and burdening their children.
Re:Truth or dare... (Score:3, Insightful)
Re:Truth or dare... (Score:5, Insightful)
HFTs certainly skim off the top of genuine traders and investors
Yes, those are the other players in the market that I mentioned. "Players" is the people involved, not just HFTs.
What they are doing is consuming the service to the detriment of other users, and extracting a tax with their unfair advantage over other users, while contributing exactly nothing back.
Which is why I said the other players (the non-HT traders) have an incentive to end that behavior, which is why it doesn't make sense that "nobody is particularly concerned with "fixing" the problem". They should be.
Re:Truth or dare... (Score:3, Insightful)
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.
Look if your timescales are weeks,months,years and likely even intra-day its hard for me to see how HFT harms you. In the 2500ms it takes your brain to click the mouse, your online broker to process your web post and execute your transaction the HFT machines may have moved the share price up or down a few pennies. That might just as easily work for your as against you, and keep in mind its going to happen on the other side of the trade too, so over even over just a handful of trades it more than likely washes out.
If you are worried the "flash crash" or "melt up" might happen just as you click, you can protect yourself easily just use limit orders (you should almost always anyway). I don't know about others but the brokerage I use charges the same commission for both limit and market orders, so I always just enter a value a few pennies more than my bid prices or a few less than my ask, that way I don't get burned, if the bizarre happens.
Finally what if you hold positions in a "flash crash" or "melt up" depending on what your position is and if you have any cash on hand it might be an INCREDIBLE opportunity for you. You might have a shot out buying or selling at 1000 times the margin you otherwise hoped to get. If you are long wait a day. If it was really a good company it should recover most of its share price in that time, no need to panic.
Re:I think we are taking significant risks (Score:5, Insightful)
Have you been asleep for the last five years? What happens in the stock market has tremendous impact to everyday people - not just those who interact with it on a daily basis. When banks fail due to their own stupidity, that impact extends far beyond just the bank.
Re:Truth or dare... (Score:5, Insightful)
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.
With automated trading systems this probably isn't entirely true anymore, since automated systems are likely take these bids into account when making their trading decisions. You could use this to trick your competitors into buying or selling a certain stock.
Re:Truth or dare... (Score:5, Insightful)
Finally what if you hold positions in a "flash crash" or "melt up" depending on what your position is and if you have any cash on hand it might be an INCREDIBLE opportunity for you. You might have a shot out buying or selling at 1000 times the margin you otherwise hoped to get.
And then they roll back the day's trading, because we can't have little old you profiting from the cascading algorithmic panic of big money.
Re:Truth or dare... (Score:5, Insightful)
Re:Slashdot headlines (Score:5, Insightful)
so its basically a d.o.s?
Re:Truth or dare... (Score:5, Insightful)
If anyone is having trouble following the details of the above, or more likely having trouble believing what they are reading, just remember this:
The stock exchange is based on rules. If anyone is making money through exploitation or gaming of the existing rules, then they will spend that money in an effort to ensure that the rules remain in their favour. When history is written, the story of electronic stock exchanges in the 2000s will be one of patronage, lobbying, connections and bribery on a wide scale. Retail investors will be the marks who lose out.
Re:Truth or dare... (Score:3, Insightful)
Re:Truth or dare... (Score:4, Insightful)
Thanks for the explanation.
Now for the real question: Anyone got an explanation that does not involve bribery to explain why this kind of crap is a) possible and b) legal?
I run an online game. There's a very simple trade market in it. If I found this to work on my trade market, I'd consider it a bug, the people abusing it cheaters and react accordingly.
Re:Truth or dare... (Score:5, Insightful)
it's like saying that fouls are in spirit of sports, link farms are in spirit of search engines and bombing the shit out of brown people is in spirit of paying taxes to fund the state. Using the properties of the system outside the explicit rules of the game may be the rational thing to do, but is never in spirit of the game.
Re:Truth or dare... (Score:4, Insightful)
From what I understand, such practices are completely in the spirit of the free market. These traders have created and exploited an advantage for profit. There is not altruistic component of capitalism that demands "contributing something back."
You fail to see the bigger picture. The only reason we have a "free capitalist market" or a "stock market" at all is precisely because the population thinks these are useful items to have. The population has the vote, they elect lawmakers to allow the useful and disallow what is not in their interest. And if HFT becomes a problem, it might very well get outlawed. Or the stock exchanges might avoid regulation by setting a frequency cap so that geographical location don't matter. A few ms for in-city trading, or a few 100ms for nationvide trade.
The market is neither free nor is the playing field level - unless there is some regulation. Without law, the biggest gun wins.
Re:Truth or dare... (Score:5, Insightful)
From what I understand, such practices are completely in the spirit of the free market. These traders have created and exploited an advantage for profit. There is not altruistic component of capitalism that demands "contributing something back."
Following your logic, a mugger is good example of a free market capitalist - he exploits the advantage he has over other people (big posture, a knife in his pocket) for profit, whilst contributing nothing back. You're right in saying that capitalism is not about altruism, but it's also not about exploiting the weaknesses of the system, and certainly isn't about using that advantage to curtail the efforts of others.
Re:Truth or dare... (Score:4, Insightful)
I don't think that HFT is about making ridiculous offers that will never be met. I think the trick is that if you want to buy shares that are trading at around $100, then you flood the market with thousands of bids for small numbers at $99 and if there are enough takers then you cancel the bids and then flood the market with thousands of bids at $98, then $97, until the number of takers on the offers drops off and that's the price that you stick at. What's unfair about that? It sounds quite reasonable on the surface - you shop around and get the best price you can. It's when having millions of dollars worth of the best hardware and fibre gives the big players an overwhelming advantage and "shopping around" with an algorithm breaks the system that it becomes a problem. Sometimes "sustainable" should trump "fair".
If you're selling a house for $100,000 and you get an offer for $99,999 and in an identical letter you get an offer for $99,998 and another for $99,997 then what would you do? Maybe you would phone up the $99,999 buyer, and if you get a "sorry I'm not interested any more", and you get the same from the $99,998 buyer whose voice is suspiciously similar, how many of these identical offers would you reply to before realising that you are being manipulated?
Re:Truth or dare... (Score:2, Insightful)
This just isn't true.
1 what advantage would an investor get from a millisecond advantage? None - you have to have some kind of strategy that makes money - regardless of the speed you can get orders into the market.
2 the advantages are not unfair - anyone can do it. It costs, in both money and significant risk.
3 study after study shows a benefit to trading from HFT.
But hey, don't let facts or science get in the way of a good witch hunt.
I don't know what the algorithm in TFA was about. It could have been an error - perhaps it was malicious. There's only one way to be sure.
But... What bad effect did it have on the market, or on anyone at all for that matter?
Re:Truth or dare... (Score:5, Insightful)
In the "bad old days," I could track an investment on a day to day basis without much worry of what has happened in the last 5 minutes. In other words, if I bought a mutual fund, it wouldn't go up, or down, by much more than a fraction of a percent between the time I placed the order and when it executed.
Since the advent of widespread HFT, even well diversified funds can fluctuate 5% per day, get unlucky on entry and exit and you've lost 2 years of typical gains - similarly, get lucky on entry and exit and you've got an extra 10% in your pocket. We've already got Las Vegas if we want to gamble, I'm looking for a little more predictability out of Wall Street, instead we are getting less and less.
Re:A couple of questions (Score:4, Insightful)
"All in all, no damage done."
BULLSHIT!
Suppose you're an honest trader trying to win in the market based on your own research and DD. All of a sudden you see this massive quote traffic on a stock you've been watching. You try to place an order against all this FAKE traffic that you wouldn't have otherwise made. It's no different than someone leaking a fake press release or engaging in a pump and dump scheme to manipulate other traders into making orders. Deliberate distortion of the market is a crime.
This also has the effect of skimming margins from the little guys. Suppose you put in a bid for $10, and you hit an ask for $9.75. That 25 cents is yours. If a company with an algobot really wants to sell at $9.75, they program their bot to start placing and canceling orders at $11 and work their way down a penny at a time until they hit your bid. They could have this running all day long until they sell of all their shares. YOU can't possibly sit there at your computer and start submitting and canceling bids at $9, $9.01, $9.02 trying to hit your bid below $10.
The markets are supposed to be a mechanism for honest price discovery. You should win when you're smarter than the other guy, not when you have a faster computer.
Now THAT was just not true. (Score:2, Insightful)
1: They get to skim off the differences. Making up for thin profit margins by huge unit time trade volumes.
2: The speed of light insists that you have a limited space to get the same latency as another HFT. Since this limited space has demand, that demand raises prices. And therefore unless you have a huge amount of money AND connections, you won't be able to bid, let alone win, a lease that close to the exchange.
3: study wrong. Fast trades make the stock market INHERENTLY unstable.
And what bad effect does it have? It makes markets crash. Since there isn't any INFORMATION passing that fast, all you work on are the motions of the trade. Since you're looking at small changes, you will not be able to tell the difference between an insider dumping shares before a bad report or an executive cashing out to put their child through Harvard. And so you will sell before it drops any more. Other machines see the bigger drop and will call an out on the product and dump even more rather than be left with the options at a low (hoping to buy when the other suckers who held on find they have to sell at low prices).
but don't let facts get in the way of your rant.
Re:Truth or dare... (Score:5, Insightful)
The main problem, not with high frequency trading per se, but with all the fake bids that are put into the system and then cancelled, is that it prevents proper price discovery in the market, because you can't tell who the real willing buyers and willing sellers are from all the noise.
Re:What are you smoking? Must be good! (Score:5, Insightful)
Put down the crack pipe, Limbaugh. This "printing press" inflationista crap is getting old.
The source of funds to pay off (currently zero-interest) debt is growth. There will be no growth until there is demand. We don't have a supply-side problem - businesses are flush with cash and manufacturing capacity, but no-one is buying anything, because they are still suffering from a massive deleveraging hangover. Businesses don't need some kind of mythical 'confidence' - they need customers.
The problem isn't government borrowing today, it's government borrowing yesterday. Today, the government should be borrowing on a massive scale to stimulate growth. If you want to scare people about debt and deficits, then you should be really pissed at the people who went on a massive government borrowing spree WHEN IT WASN'T NECESSARY to pay for shit like unnecessary wars and tax cuts for rich people - not at the people who are trying to fix the damage.
When the economy is depressed, and interests rates are zero, the government should borrow like crazy. When the economy is growing, and interest rates start to go up, government borrowing (and spending) should go down. Instead we do the opposite, and the crazies come out with ex-post-facto idiot economic theories about how our current problems are the result of current policy, as if the number one world economy turns on a government dime. Wake the fuck up.
Much of the rest of the world is doing better than the US these days? Wow. We certainly have our problems, and we're not number one at absolutely everything, but what the hell are you talking about? That's completely ridiculous.
Re:Truth or dare... (Score:4, Insightful)
If you open a trading position that goes heavily against you, you can end up trading on margin even if you didn't start there. Take the simple example where someone trades their whole account with standard long positions. If the average price on those drops 25% before the close one day, via something like a flash crash, the next day they'll be on margin relative to the new balance in their account. Margin calls can happen just as easily from bad trading results as they can from using margin for extra leverage.
The claim I object to here is that people will always be able to sit through a crash until the usual regression to the mean afterward. That's true in a lot of cases, but it only takes one bad case to wipe someone out. The math behind Cumulative Risk of Ruin [bj21.com] is no fun.
Re:Truth or dare... (Score:5, Insightful)
It's undisputed at this point that HFT played a significant role in the 2010 Flash Crash [wikipedia.org]. Even though the intention is not to move prices, accelerating price moves can be an unintended side-effect of them at play, via things like adding to market congestion. It won't take many of these "4% of trading activity" bots to seize things up so that prices could go bonkers. There are plenty of bots executing real trades based on market activity around to serve as the other side of a bad feedback loop.
I was using a personal example to demonstrate how short-term crashes can result in an unrecoverable bad situation even if prices come back later. But the source of the price crash doesn't have to be identical to mine to run into the same class of problem.
Re:Liquidity (Score:4, Insightful)
Re:Truth or dare... (Score:5, Insightful)
Re:Truth or dare... (Score:5, Insightful)
I've read about 12 studies now [...] they all conclude the HFT is overall beneficial to the market as a whole.
That's funny. I've read studies which say otherwise, and I can even cite them [nanex.net].
How High Frequency Trading Harms Even Long Term Investors
- Investors are warned against using market orders and stops because HFT can and will suddenly withdraw their quotes. This alone should tell you something is rotten at the core.
- Some universities, such as Georgetown, can no longer afford to buy TAQ market data for their professors or students to analyze. This will lead to less academic oversight, guidance and involvement, as well as students who are less prepared for careers on Wall Street. Data has become prohibitively expensive because of all the excessive quotes generated by HFT.
- Quote spreads are much wider and less stable during market open, which causes many micro flash crashes in individual stocks.
- Misleading price quotes interferes with price discovery, one of the core functions of a stock exchange.
- Mis-allocation of resources, both human and technological.
- If left unchecked by regulators, traders who want to process quotes, will soon need super-computers, 10 gigabit connections and their own engineering staff to have the same basic level of trading information they needed in 2006.
- HFT generated so much Quote Spam in the flash crash, that it took 5 months for the SEC to assemble the data.
- During the flash crash, excessive quotes from HFTs overloaded quote data feeds, causing severe delays: stock quotes from some exchanges were behind over 30 seconds during the height of the flash crash.
But I'm sure these are all good things, and help keep the markets healthy. I must just misunderstand how awesome they are.
Re:Inflation and lack of competition (Score:4, Insightful)
There are well placed equities, it's just they are mostly not in USA.
Really? Compare, say, the S&P 500 (US, 25% return this year), the FTSE 100 (Europe, 10% return), ASEAN (Asia, 20% return), which strongly suggests that the USA is a pretty good place to put your money. Gold and silver, as previously discussed, are either flat or dropping, which also strongly suggests that the hyperinflation you're concerned about isn't happening.
I get it: Fiat money is just a piece of paper with no inherent value. The thing is, the social value of a dollar still exists, there's no evidence whatsoever that we're anywhere close to turning into Zimbabwe, and there's lots of evidence that the monetary policies of Bernanke are helping substantially in mitigating the effects of a recession (in fact, if it doesn't, there's no real point in having a Federal Reserve or even a currency). And what will happen (if the Fed is doing its job) is that when the economy recovers, the Fed sells back those assets they bought up back to the open market and may even raise interest rates to cool things down.
For comparison, would you rather be in:
A. The United States (7.8% unemployment and dropping slowly), where the Fed cut interest rates and bought up assets like crazy, risking inflating the dollar.
B. The UK (8.1% unemployment and basically flat) where the Bank of England cut interest rates from 4.5% to 0.5% in response to the recession, risking inflating the pound.
C. Spain (25% unemployment and climbing rapidly), where the European Central Bank is maintaining the value of the Euro at all costs.
Re:Truth or dare... (Score:5, Insightful)
How does the HFT magically know what you were willing to pay? It's really hard to have a reasoned debate when people are attributing ridiculous feats to HFT.
Imagine two genuine traders, GT1 and GT2. There's an item that GT1 wants to sell and GT2 wants to buy. GT1 is prepared to sell for as little as 21.10, and GT2 is prepared to pay up to 21.20. Past trades have been at 21.17, so GT2 offers 21.15, and the sale occurs. Now add a high frequency trader, HFT.
Rinse and repeat to find the maximum that GT2 is prepared to pay. Buy from GT1 at their minimum price, and/or sell to GT2 at their maximum, pocket the difference. GT1 has made less than they would have without high frequency trading, and GT2 has spent more that they would have. And GT1 and GT2 are probably your pension funds.
Re:Truth or dare... (Score:5, Insightful)
Nope. Or more specifically, HFT guys get a big discount. That's why you get so much screaming and kicking over "transaction tax" proposed in EU right now. It wouldn't do anything meaningful to actual investors, but it would kill HFT because its profits are based on huge volume of trades executed with razor thin margins as they are skimming the top of the market. And with it, the profits of major players who run their own HFTs as well as profits of stock markets would go down, while reliability of market would go back to the levels 1990s when most diversified portfolios didn't really fluctuate much on daily basis as they do now.
Until major financial players are banned from lobbying politicians as effectively as they can do today and stock market rules stay lax, HFT will continue to destabilize the stock market. That is the reality of today.
Re:Truth or dare... (Score:5, Insightful)
As far I know in most cases they cannot cancel fast enough, so one of the key areas of research in HFT algorithms is how to determine the lowest sell/highest buy rate of the "genuine traders" in the shortest time frame with lowest possible buys at too high rates. So you get "buy a small amount of stock at price x, buy at slightly less then x, even lesser then that" until you hit the "no sale" at which point you buy everything at lowest price all while doing the same for the buyer in the opposite direction.
That is why speed matters. This needs to be done before GT1 and GT2 find each other and execute the trade as it would have happened without HFT. Even fractions of milliseconds matter. And that is why HFT adds zero liquidity to the market - HFT algorithms will not make trades that don't have a profitable buyer and a seller found. They make trades before buyer and seller find each other.