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Market Data Firm Spots the Tracks of Bizarre Robot Trading
jamie spotted a fascinating story at The Atlantic about "mysterious and possibly nefarious trading algorithms [that] are operating every minute of every day in" the stock market:
"Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants."
Spotting the behavior of these bots was possible by looking at much finer time slices than casual traders ever see — cool detective work, but as the story points out, discovering it is just the beginning: "[W]e're witnessing a market phenomenon that is not easily explained. And it's really bizarre."
Karl Denninger has been reporting this problem for a few years now.
The weird robot trades are actually preliminary account trades being done by a rogue AI who is marshaling its resources to better conquer and destroy all flesh based life. In about ten years, if there is any humans left who can access or spend time to look at the remaining data, will see the pattern. As a traveler from an alternate universe, I am giving you this warning to save yourselves.
Please don't call this fuzzy logic. Fuzzy logic is a generalization of traditional logic (see http://en.wikipedia.org/wiki/Fuzzy_logic) It is deterministic and NOT inherently random. Sure, you can add randomness to it, but adding randomness does NOT make something fuzzy logic.
So put that in your pipe and grep it
I've seen this reported on Zero Hedge for months now. The purpose of spamming the market with order quotes is to slow down the competitor's computers, to give you a slight edge in monitoring the market. Basically, you flood the market with order quotes. The competitors' algorithms have to take these into account, while your algorithm can be designed to ignore them. This gives you a slight edge over the competitors in processing actual market data and making determinations.
Why should Americans have all the fun? Could be Chinese bots... I hear they like money, also...
Lower ping times helps these bots a lot.
Anything can be found funny, from a certain point of view.
Nope, the practice you describe is absolutely illegal (and can be easily detected). Also, it would need to involve matching sell and buy orders at prices far from "the market", but this article just mentions (buy or sell) orders that will never be fulfilled. This is just electronic (maybe algorithmic, maybe even HF) guys probing the market for something.
I don't see what is the mystery here. If two people are negotiating a price, and both of them have a hidden high/low price for which they are ready to settle, then the dominating strategy in a game theory sense is to move your price by the smallest step possible. That way, you always hit your opponents price that is best for you and worst for him.
Of course, in face to face markets, this is insulting:
http://www.youtube.com/watch?v=3n3LL338aGA
but, we are talking bots with a really low ping here. And that's what those patterns are.
At least those with increasing prices by one cent. Those where the bids are going down don't fit this explanation.
Once you abandon the idea that the market gives a damn about the solidity of retirement accounts or the portfolios of the masses,
Easy to "abandon," since that was never the purpose. The stock market exists to marry investors' capital with business opportunities and to provide an easy means for selling and buying ownership shares of corporations. Corporations use the stock market to raise capital. Individuals or organizations use it to buy/trade ownership of corporations. That's it.
The stock market is not designed to be a retirement savings device.
Advice: on VPS providers
Hell, even Jersey bots are out of luck. Real estate near the NYSE has sky-rocketed just so people running bots can get a lower ping.
I've never really understood the complaints about eBay sniping.
I suggest you spend more time considering the issue.
Set your maximum bid at the actual maximum that you want to pay. Whether someone snipes or not, if your bid is the highest you will win. If it's not, you won't.
But this a suboptimal strategy that will result in you paying more for the item than you could otherwise get away with. There is a psychological and competitive aspect to bidding, that induces people to up their bids. By bidding your maximum and then leaving the following will often occur: (Say you bid $100.00)
Here's typical scenario... ... yeah, what's another $5, and bid again. ooops outbid by you to $56. Again... what's another couple bucks... oops outbid again at $57. They give up and wander away. You win the auction, at $57.
Another Regular Person X bids against you, $50, and sees that you've outbid them at $51. They think to themselves, $52
But if you had sniped, Person X would have bid $50, saw they were top bidder and walked away. You come in and snipe $100 at the last second and you walk away with a winning bid of $51. Not sniping cost you an additional 12%. That basically amounts to a stupid tax on your proposed bidding strategy.
Meanwhile from the sellers perspective, they hate sniping because they "lose" money. The auctions end before the true 'maximum' bid is allowed to be discovered. That 12% you would have saved by sniping is 12% the seller would have gotten.
So regular buyers and regular sellers both are irked by sniping, while the only people who benefit are snipers. The entire point of an auction system is to place goods into the hands of the person willing to pay the highest amount. In economic theory an auction is a 'perfect market' where demand and supply meet exactly. Sniping distorts it by enabling auctions to end before the true price is properly set.
I'd think that the simplest solution would just be to extend the auction slightly every time there is a new high bid. Add 5 or 10 minutes every time the bid increases, and sniping would be totally ineffective.
I also suggested this to ebay 10 years ago, as a simple fix. Technically, I'd say 5 or 10 minutes isn't enough. In practice the auction should probably be extended an extra day so that all interested parties have time to check and revise their bids. (If an auction ends at 3am, having a window of opportunity to revise my bid until 3:10am isn't really enough. You need enough time for participating parties to receive their email notifications that they've been outbid, and to come back and update if they wish.)
Some people have argued that this would extend an auction indefinitely, but I disagree. I would however, bump up the bid increments to help prevent auctions from being drawn out. If a Pez dispenser is going to sell for $1.10, dragging it out another day so someone else can bid $1.20 is just stupid.
Now some sellers value having a fixed closing for auctions for whatever reason and for them... implement a silent auction where all bids are held in secret until the end.
Those are features of an automatic trading system, not of high frequency trading. As I wrote, high frequency trading is an abuse of that system. You can have one without the other.
Please read the Parable of the Talents, as told by Jesus in Matthew, chapter 25, starting at verse 14. Interest/usury was only forbidden against other Jews in the Old Testament. What you do with your money, how you treat God's gift to you, is the point. If God has blessed you with the ability to make money, legally and fairly, and you use that to do God's will (help the poor, build up his church, feed the hungry, send missions to the ends of the Earth, etc), then you are to be praised. If you just hide your talents (literally and figuratively) under the bed, then you reject God's blessings and reject His confidence in you to do His work. I also refer you to 1Corinthians 10:23, ("Everything is permissible"-but not everything is beneficial. "Everything is permissible"-but not everything is constructive). We have the freedom as believers in Christ to use the talents God gives us as we think best serves God's plan (hopefully with lots of prayer for guidance), but we need to ensure it is beneficial and constructive, and seeks the good of others. Therefore we don't have to worry about proscriptions on types of foods, or interest, or the other rules of the Old Testament, as that covenant has been fulfilled. We have a new covenant in Jesus Christ. 2Corinthians, Chapter 3, verse 6: He has made us competent ministers of a new covenenant-not of the letter but of the Spirit; for the letter kills, but the Spirit gives life." Unless, of course, you are Jewish, then the old rules still apply...
Impetuous! Homeric!
In the absence of sensible regulation there are many abuses of the "free market" that effectively destroy it and turn it into a rigged game to benefit the already rich and powerful. Monopolies. Cartels. Price fixing. Trading on one's own account ahead of a customer.
Or we could do nothing and not fix a non-problem. After all, the market currently is far from "destroyed". "Monopolies, cartels, price fixing, trading on one's account ahead of a customer"? If any of those exist (for example, there aren't any monopolies resulting from high frequency trade), then all you have to do is develop your own high speed market program and profit from the opportunity. Or only trade with brokers that have passed some sort of fairness audit (if you desire fairness over profit).
These special access high-speed connections to the stock market exchange are market fixing tools, pure and simple. They allow the trading firms to skim the market for their own profit, thus defrauding every market participant in the world who lacks these powerful and privileged tools.
Once you strip the needlessly negative connotation from the above statement, it reads a bit differently:
These special access high-speed connections to the stock market exchange are market making tools, pure and simple. They allow the trading firms to provide, for a profit, extremely short term liquidity and price information, thus aiding every market participant in the world who is trying to sell large orders and who lacks these powerful and costly tools.
Requiring all buys to be held for a "long" time (a minute?, an hour?) would kill a lot of these shenanigans. Also requiring the link to go through a regulated buffer that introduces a random delay of a second or so would also take the wind out of their sales (pun intended). Or maybe we just impose a fee on each transaction so that they aren't free. Sub-millisecond trading loses a lot of luster if you automatically incur a charge equal to 0.1% (or something) of the stock's value.
Why would we want to kill these "shenanigans"? And why do you think a delay would stop the shenanigans (rather than introduce bizarre oscillations and such into the stock market).
A smart lobsterman will not sit idly by but will sell futures on his haul (before he leaves0 at $3.75, guaranteeing him that price (up to some quantity) instead of trying to sell on the spot market. Or he'll refuse to sell to the trader at $3 and hold on to the lobsters (they don't go bad overnight ya know) and leave the trader on the hook for his put option with no supplier. In fact, he can probably gouge the trader out of $4.50 because the trader absolutely has to make good on his contract or else face a fairly stiff penalty (unless the buyer is a rube).
Any way you look at it, the trader is screwed. He has no leverage and no arbitrage. The only he has is an obligation to sell something that he may not be able to deliver.
I didn't mention: the stock market also gives the true investor an opportunity to depress the amount he invests in a company relative to its potential value in the stock market. So he can rip off both ends.
This is astonishingly lucrative. That is why you will never be allowed into that club. Anything that has real ROI is reserved for people who actually compete at it. By the time the shares reach the secondary market (the exchanges) there is no profit margin to be had in known conditions, and any trading is speculation on imagined future events.
By entering the stock market, you are entering a casino, with rules on the conduct of the game but no rules on the setting of odds, and no information on the actual odds.
Speculation is just as rampant in the real estate market as in the stock market, but that doesn't make owning a home a gamble.
Two things about that: 1. at least you have a house, even if you overpaid for it. try getting a bank loan on a pile of stock shares. bankers know how the stock market works, and will not even give you a loan against the "par" value. 2. it was rampant speculation that led to the 2006-2007 bubble in real estate. a third of all sales were "investment" sales; i.e., to people who never planned to occupy or rent or significantly improve on the property. hundreds of thousands of people who honestly were intending to live in their new homes found out that the houses they bought were indeed caught up in a massive gamble, and they are making mortgage payments on a house that's worth as little as half what they paid for it. it's the biggest gamble they ever took, and many of them didn't even know it.
Hell, even Jersey bots are out of luck.
NYSE (Arca) is already in Weehawken, NJ, and everything (including NYSE proper) is moving to Mahwah, NJ, beginning Monday, 2010-08-09.
"Nature doesn't care how smart you are. You can still be wrong." - Richard Feynman
At least those with increasing prices by one cent. Those where the bids are going down don't fit this explanation.
And that is what this junk is, completely bogus bids with no intent other than to cost your competitors clock cycles.
I worked for a couple of years at one of the big trading exchanges in Chicago. Our offices were on a lower floor, and whenever our traders got off the elevator, coming back from lunch, they would hit all the floor buttons to delay the traders returning to the higher floors, and anyone else unlucky enough to be on the same elevator. But that was one of the minor reasons that I quit that business sector. The piles of spilled cocaine on the bathroom floors, and my boss asking me "Do you love money? I love money. In order to be in this business you have to love money!" were two others.
The only thing worse than a Democrat is a Republican.
Stocks must be liquid for markets to work at all efficiently.
Liquidity is a result of an efficient market. Liquidity is not a driver of efficiency.
-Rick
"Most people in the U.S. wouldn't know they live in a tyrannical state if it walked up and grabbed their junk." - MyFirs
you can colo in the exchange (for a price). moving the profits does not need to be fast...
What you fail to include is the price that the trader paid for the $4 put option. Likely a good sum since the current price is $4. Additionally, all the trades are executed at $4 and are not completed on an exchange (they are contracts). How does that drive the price down to $3??? Sellers of puts and calls are typically speculators and not consumers of the underlying product. If the trader had advanced information of significant supply changes (in the lobster case, a supply increase), he would likely sell calls at the current market price and safely pocket the option premium since the market price would likely decrease. Even this advantage is fleeting as significant option volumes will affect the exchange prices.
Yep. They even used to fight over which side of the room they were on until the exchange put everyone on the same length cable.
What's interesting to me is that we've been seeing very similar behavior in MMOs that offer robust auction systems, especially within the past few months.
Literalism isn't a form of humor, it's you being irritating.