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."

Comments

Here's an explanation for you:

[Pojut]

The "market" is a fucking scam.

There, that wasn't so hard, was it.

Re:Here's an explanation for you:

[eldavojohn]

The "market" is a fucking scam.

There, that wasn't so hard, was it.

Well, in the article they say that one firm's explanation is that high frequency traders are injecting quotes into the system because they know about them and don't have to sort through them when they are posted ... but their competitor's bots have to look at that data and sort out the real data that are actual useful quotes instead of the outliers which are quotes that will never be taken.

So scam is close but spam might be a better word for this.

I also get a kick out of how periodically in this article they remind us that high frequency trading is good for the market and these people that don't do anything that act as middle men are actually good for the market because they up availability or "eliminate inefficiencies" (that's my favorite). And they're all taking money out of this magical unending bucket of cash ... quant funds and high frequency traders are so 1929 I don't even know where to begin.

Re:Here's an explanation for you:

[vlm]

I also get a kick out of how periodically in this article they remind us that high frequency trading is good for the market and these people that don't do anything that act as middle men are actually good for the market because they up availability or "eliminate inefficiencies" (that's my favorite)

Maybe they started with an intelligent explanation that seems to fit reality, like we're watching a very confrontational version of simulated annealing among multiple competing firms using real money, but you run that thru the "english to journalist" filter and get the gibberish you describe. You have to realize journalists are the guys that flunked out of Calc I in their freshmen year and then spent the rest of their schooling drunk or stoned, as gatekeepers to the masses they are always going to be epic fails.

http://en.wikipedia.org/wiki/Simulated_annealing

Its fairly perceptive to note that journalist style gibberish is often used by people trying to scam. There are plenty of (often self serving) religious / philosophical arguments that claim markets are always scams, etc. Need to very carefully consider cause vs effect and correlation vs causation or else you just send up with cliche instead of insight.

Re:Here's an explanation for you:

[Vitriol Angst]

I've read a lot of detailed analysis, and some nonsense "usually in favor of the practice" --- and I think that it all comes back to the concise brevity of the OP;

the "market" is an EPIC fucking scam.

And YES, it was that hard -- Slashdot cannot come to some simple hyperbolic generalization without lots of handwringing, gestalt therapy, and gnashing of virtual teeth in search of the glimmering silver lining of an exposed rectum.

>> I do however believe that the MOST LIKELY use for the outlier transactions is to "poison the data" of firms trying to generate trend analysis -- but the net effect to you and I trying to use the market as a place to save for retirement or as venture capital -- well, "see above" -- it comes right after the word 'EPIC'.

Re:Here's an explanation for you:

[vlm]

Companies are completely cognizant of the ways they can manipulate information to confuse the public

Some insight might be that the people complaining the most about the HFT sub-market, are not involved, affected, etc by the HFT sub-market. Small delta $ over small delta t should have no effect on "multi-decade retirement investments"

Its like discussing fractal theory with a lobster man. Lobstah-man asks, how far away from the pier am I? Fractal guy replies, Well, see, that's complicated because the coastline is self-symmetric at multiple resolutions so where exactly is this pier you speak of on a Planck length basis, and the one dimensional line bordering the water and sea is infinitely long, so on a Planck quantum time basis its hard to define exactly how long it'll take to get to the somewhat undefined pier location. Lobstah man gets pissed off and says Well, OK, that's all very confusing or interesting or both, probably to try and rip me off, but how far away am I from the damn pier, two hours or three hours?

Re:Here's an explanation for you:

[omnibit]

I'll probably be modded down for being counter consensus but so many delight in crying foul when they don't understand a concept.

The markets bring together buyers and sellers (who would have thought!). It just so happens that a group of math and programming whizzes know how to capture the minor fluctuations in market sentiment.

Human day traders (attempt) to make a living out of playing the bid/ask game but usually their volume is so minute that it has almost zero bearing on liquidity. Markets need liquidity to avoid gapping - when spreads become large and there is a disconnect between buyers and sellers. Volatility is exacerbated by a lack of liquidity.

As for the scam nonsense, attempting to profit on capital markets is a perfectly legitimate form of business. No body was swindled. Most people cannot program for HFT and therefore think it is hocus-pocus, with amoral corrupt businessman profiteering at the 'expense' of the rest of us. All they're doing is capturing volume at a faster rate than human traders. Most investors aren't interested in short time horizons - they make investment decisions independent of how quickly they can turn a stock - they simply limit a price, form an expectation and sell when they deem fit (e.g. for the price hits a target, some event happens, etc).

If HFT are spewing out thousands of orders a second - let them. It's up to other HFT to adjust their parameters, or the exchanges to limit the number of orders to keep server integrity.

Despite popular belief - the markets don't function as casinos (though exceptions remain, a la China). Sentiment and expectations do run away, we only need look back at the 2008-09 crash. But that per se does not indicate a casino like behavior - it just means few people ever believed the world economy would tank as hard as it did.

The excoriation of HFT might be fun, but it's all for nought. They're making money and you're jealous. Tall poppy syndrome reigns supreme.

Re:Here's an explanation for you:

[Tarsir]

Unless you pointed to an incorrect post, he has not been reporting on the problem mentioned in TFA. Specifically, Denniger is claiming that HFT harms the market (I have no idea if this is true, and don't care). The article is discussing trades which are made at a high frequency, and have no apparent purpose: they are so far from actual ask and bid prices that there is clearly no intent to actually make a transaction.

It should be noted that TFS states this quite clearly. I know, I know, "Are you new here? We don't read article summaries around these parts!". Regardless, I think it is worth pointing out when people are too careless to understand the fucking summary of the article before posting, or moderating. +5 informative indeed.

Re:Here's an explanation for you:

[Anonymous Coward]

Lobstah man gets pissed off and says Well, OK, that's all very confusing or interesting or both, probably to try and rip me off, but how far away am I from the damn pier, two hours or three hours?

And this is where a trader would figure out that the current price of lobster was $4 a pound, the boat carried 1,000 pounds of lobster, and the lobsterman is 2 hours and 37 minutes from the dock. The trader immediately buys a put option to deliver 1,000 pounds of lobster at $4 a pound. One minute before the lobster boat docks, the trader begins to execute the put option, driving down the local market price for lobster to $3 a pound. The trader meets the boat at the dock, purchases the lobster on the boat for $3 a pound, and completes the execution of the put option by delivering the lobster to the lobster pound. The lobsterman makes $3,000 and the trader makes $1,000.

In the real world, the lobsterman takes care of the problem by using the trader's lifeless remains as lobster trap bait. In the financial world, the trader is hailed for discovering inefficiencies in the lobster trading market, and receives a hefty bonus at Christmas.

Re:Here's an explanation for you:

[radtea]

Any way you look at it, the trader is screwed. He has no leverage and no arbitrage.

Nope, just friends in Washington named George W. Bush and Barack H. Obama who will bail him out and absolve him of responsibility.

Then, when the lobsterman--who has just been screwed out of of $1000 by a manipulative leach--can't pay the bank for the loan he took out to buy his boat, the same people will refuse to help him, because that would be "socialism."

Hoping

[alanebro]

It's probably someone programmed it to spam with lowball offers in hopes that some actually succeed. It wouldn't take very many successes for the buyer to make a profit.

I mostly agree! But let's soften it a little.

[Petersko]

"The "market" is a fucking scam."

I think I'd prefer to say that the market has a purpose, and that purpose has absolutely nothing to do with maintaining wealth for the casual investor. Once you abandon the idea that the market gives a damn about the solidity of retirement accounts or the portfolios of the masses, then it's easier to accept that the purpose of the market is to move money around and around in a big circle, while slowly siphoning it off into the pockets of particular groups.

Stocks are a massive game of hot potato. Whoever is holding the stock with the game is over gets burned.

I say it's not necessarily a scam because it should be clear to anybody looking in that this is how it works. Like the rake at a poker game, if you wait long enough the house has all the money. This fact isn't hidden - you just have to wake up to the implications.

Re:I mostly agree! But let's soften it a little.

[gtbritishskull]

I disagree. As the parent said, the job of the stock market is to marry capital to seekers of capital. A retirement account is a collection of capital that you want to make money on. If you can afford the risk of the stock market (you have enough time for variations in the stock market to even out) then it is the best place to put your money because you will get the highest return. But, those people "nearing retirement age in 2008 and 2009" that "watched their retirement plans go out the window" were stupid. If you are about to retire, you should have a large percentage of your money in bonds. Because, you can't afford the risk of the stock market. That shows that their retirement accounts were mismanaged, not that the stock market for some reason should not be used when saving for your retirement.

Re:I mostly agree! But let's soften it a little.

[Anonymous Coward]

large percentage of your money in bonds

Yes, because $1.5E12 deficits are not a problem.

Re:I mostly agree! But let's soften it a little.

[John_Yossarian]

Just because speculation can distort the market at times doesn't mean it can't be a sound investment. 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.

Re:I mostly agree! But let's soften it a little.

[blair1q]

Any trade where your purpose is to make money out of money seems pretty pointless to me.

If you're actually lending that money to a company to improve its productivity (i.e., investing) then you're putting money to work instead of keeping it in your pocket, and that has a multiplicative effect on the economy. If you can charge interest and make money from your money then that's a good thing.

But the stock market isn't that. It's people trading the same gambling checks around and around in a circle, with the brokers shaving off a few pennies each time they change hands. They make decisions for a random gamut of reasons, but ostensibly on speculation the checks will be worth something some day. But that will only happen if someone with real money decides it would be better if he owned the company outright and buys up the checks. But he's doing that because he knows he can make a ton of real money improving the productivity, product market, or profit margins of the company, and he's paying you a tiny fraction of it. And he probably knows the price is depressed because of the mismanagement and you're desperate for a way out.

So you got screwed getting in, and screwed getting out before it got good. But you were told you were "investing in America" or some top-to-bottom lie like that, and you feel lucky you got a 30% premium, and you probably don't notice that he sold the company two years later for 4 times what he bought it for.

Re:I mostly agree! But let's soften it a little.

[PCM2]

Any trade where your purpose is to make money out of money seems pretty pointless to me.

You mean like where I have a bunch of money, and I loan it to a guy, and he uses it to make widgets, which he then sells and uses the profits to pay me back my money plus interest? Yeah, I can't imagine how that would be of benefit to anyone.

Re:I mostly agree! But let's soften it a little.

[CodeBuster]

The value of a share of stock is derived from it being a share, albeit a small one in practice, of ownership in a business. The price of that share, in the long run, will reflect the proportional value of the benefits that would ordinarily accrue to the owner of that business. It is very easy to see why shares in a viable business, however small individually, are NOT worthless. Suppose, for example that the "worthless" shares of a viable and profitable business were selling for $0.01 per share. Don't you think that someone would come along and buy up all of the shares at that price? Even if the buyer's only intent was to liquidate the company and pocket the resulting profits he would still be interested in buying the outstanding shares at that price because if he acquired control of the company, perhaps by becoming the 51% owner, then he could force that kind of liquidation. This is why the long term share price in the marketplace tends to reflect the true present value of the underlying business. A share of something is worth something; It is not worthless. Now in the short run people can and do play psychological games in the marketplace which is why the moment to moment price of a stock is essentially random. However one must not confuse the result of individual games (i.e. I buy and you sell; game finished) with the iterated version which is played continuously for years, decades and even centuries. The individual stock investor does best by doing his homework, looking at the qualities of the business that cannot be feed into a short term computer trading algorithm, and then investing for the long run. This practice has very little to do with gambling.

Gamble all you want, but try to avoid spreading the lie.

This one gets thrown around a lot here on Slashdot, where the investing (particularly stock market investing) == gambling meme is often taken for granted. However, this analogy, like most, is a rather crude approximation of what is actually happening when one invests. If you are interested in a more in-depth treatment of this subject, there is an excellent essay on investorguide.com which covers this very topic, investing vs gambling.

Re:I mostly agree! But let's soften it a little.

[quenda]

You know how many people nearing retirement in 2008 and 2009 watched their retirement plans go out the window?
 

That's just dumb. The first rule of retirement savings* is to shift your investments to lower risk ones as you get closer to retirement.
So start with a growth-oriented share portfolio when you are young, and move towards government bonds as you near retirement.
This must have been in the first leaflet I ever read from a fund manager.

(* or 2nd rule after "diversify".)

Re:I mostly agree! But let's soften it a little.

[Black Parrot]

The "scam" here is the massive one where America thought the purpose of the market was to provide retirement savings- Thus people dumped all their money into the market in hopes of having big retirement payouts.

Various replies disagree with you, but it has certainly been marketed to the public as a "Make Money Fast" game for ordinary people.

Look at the surge in the DOW since the 90's- that's everyone's retirements going straight into the market. You know how many people nearing retirement in 2008 and 2009 watched their retirement plans go out the window?

And here's the real motivation for all those Republican politicians who want to "save" Social Security by moving the money to the stock market. A sudden two-trillion dollar flood of money inflates share prices, the savvy rich people cash out, the correction hits, and the savvy rich people use their inflated profits to cash back in. The people who will actually need Social Security when they retire get left holding the empty bag. This privatization plan, like all others, is just a scam to move ordinary people's money into rich people's pockets.

Designed to create opportunities

[topham]

They are designed to create timing opportunities in other trades.

Re:Designed to create opportunities

[Anonymous Coward]

They are designed to defraud other traders.

Fixed that for ya.

Nope, it's right on

[RingDev]

I read an interview a few weeks ago about these trades. When we're talking about the majority of all stock trades being done by these incredibly fast bots, where people are looking for every possible advantage, there are many tricks. One of them is to flood out a huge quantity of bogus bid/sell offers in sufficient enough bulk that it may cause your competition's bot to slip a few micro seconds. Just enough for your own bot to snipe a fraction of a cent advantage.

If you are interested in the 'Cyber-War'. Forget China, head to Wall Street.

-Rick

Re:Nope, it's right on

[countertrolling]

If you are interested in the 'Cyber-War'. Forget China, head to Wall Street.

Why should Americans have all the fun? Could be Chinese bots... I hear they like money, also...

Re:Nope, it's right on

[modmans2ndcoming]

so, they start very high/low and come down/up in tiny increments until they get a bite on their offer?

Re:Nope, it's right on

[sumdumass]

Lol.. Are you sure it's to cause your competition's bot to slip a few micro seconds? Or could it be someone who simply wants to avoid the lag of checking the prices before participating in a transaction so he simply sets the bots to always submit the preset buy / sell limits and if it's in range, the trade is accepted, if not, it's simply rejected.

That would shave more then a few microseconds from the competition compared to attempting to bog them down which could also bog their transaction down at the same time.

Re:Nope, it's right on

[lgw]

This looks far more like steganography. There's a lot of data in these patterns, and it has nothing to do with trades. Someone is communicating using a very odd channel!

Re:Nope, it's right on

[inKubus]

It is that, but they could just be trolling as well. In a market with billions of shares and millions of actors, there are bound to be mistakes and typos. Someone puts an autocommiting ask out for a stock with an extra zero and there's no one looking there, no problem. But if there's an electronic bot trolling that price range, it can lock the order before they have a chance to retract. Now there are rules and appeals to mitigate this, but if it was just a small thing then it might be overlooked. Of course, the obvious thing is annealing, like you mentioned.

Re:Nope, it's right on

[sjames]

These are the people we're supposed to respect who supposedly are worthy to handle our economy and profit handsomely by doing so.

Never mind locker searches at the high schools, let the drug dogs loose on the trading floor.

Re:Nope, it's right on

[Spazztastic]

These are the people we're supposed to respect who supposedly are worthy to handle our economy and profit handsomely by doing so.

Never mind locker searches at the high schools, let the drug dogs loose on the trading floor.

High School kids don't pay huge amounts of taxes into the system studying and doing homework, but traders do. That's why you'll never see a narc raid on a trading floor.

Free Market = good; Capitalism = Usury

[spun]

Usury is the sin of lending money for unfairly large amounts of interest. Capitalism is an economic system of lending money for as much profit as possible. Capitalism makes labor subservient to money. It lets people expand their power over others, not by working, but by lending. This unfair adjudication of risk and reward, and the subsequent consolidation of power into fewer and fewer hands, is why many religions, at one time or another before the rich took them over, considered usury a fairly serious sin.

The rich do not have to work to earn a living, they just sit back and let the money roll in. Supposedly the return they get is for the risk, but there is no risk involved. The rich can buy politicians, laws and experts who, in practice, reduce the risk to near zero. The average investor faces at least some real risk, but not the truly wealthy.

Re:Free Market = good; Capitalism = Usury

[OakDragon]

Capitalism is an economic system of lending money for as much profit as possible.

Capitalism is more properly defined as a system in which the means of production are privately owned (as Wikipedia has it). It may have some aspects that conform with your definition, but that's not the whole of capitalism.

Re:Free Market = good; Capitalism = Usury

[dcollins]

"I'm not religious at all, but even I know this is the 'correct' interpretation."

This sounds like total bullshit.

The article you link to doesn't say anything like this. In fact, it says the opposite in the second sentence:

Usury... originally meant the charging of interest on loans. This included charging a fee for the use of money, such as at a bureau de change. [Wikipedia, "Usury"]

Wow, that's better

[Itninja]

WoW has rules against using scripts, bots, and 3rd party programs to play for you. Failure to abide by the rules get you banned.
The stock market trading system has no rules against scripts, bots, and 3rd party programs to buy millions Every time I think about how WoW regulates the artificially increasing of fake wealth while the stock market has no regulation regarding the artificially increasing of actual wealth, I die a little inside.

Re:Wow, that's better

[trout007]

You are exactly right but you are missing the point. There are no government regulations on WoW. It's operates completely to make money by pleasing it's paying customers. If they don't self regulate the game and the players don't consider it fun anymore they stop paying. The difference is the Exchanges are regulated by the government. So they only people they have to please is the SEC. Without government oversight they would have to operate more like WoW and pay attention as people abandon their markets that they consider rigged.

Also the government almost forces people into the stock market through tax laws. If the government didn't continually devaluate the dollar you could just save your money in a bank and you wouldn't lose purchasing power. If you keep your money in the market in a brokerage account they tax every dividend and profit you make. So they set up IRA's and 401k's to lock you into the stock markets. All so their powerful friends can leech off the hard work of millions of people.

Re:Wow, that's better

[CodeBuster]

Also the government almost forces people into the stock market through tax laws. If the government didn't continually devaluate the dollar you could just save your money in a bank and you wouldn't lose purchasing power.

That is an excellent observation and one that many who demonize investing and free markets here on Slashdot would do well to remember. Indeed, one does not have to go very far back into the economic history of the United States to arrive at a time when saved money actually bought more goods and services as time went on (the supply of gold and other precious metals being relatively less elastic compared to the rapidly expanding economy) and was a true store of value. This "deflation" did not in any way harm the economy, even though wages went down and money was harder to come by it bought MORE goods and services as time went on so people's standard of living rose despite of the deflating money. The only people who were hurt by this were those who had borrowed imprudently at high rates of interest (but then again these are exactly the people who NEED to be punished in a healthy economy for diverting valuable resources to wasteful uses). This is in sharp contrast to the massive inflation of fiat dollars which has occurred relentlessly since 1972 when President Nixon closed the gold window, severing the last link between our money and any tangible commodity backing and effectively ending its ability to act as a "store of value" (one of the classic features of any viable money). Ever since that time, the dollars in your pocket are backed by nothing but the, "full faith and credit" of the United States government to repay you with...dollars backed by nothing! Today your dollar is worth only ~2% of what it was worth before the gold window closed; a 98% LOSS of value! Prices have increased rapidly ever since then to account for the ballooning quantities of new money entering the economy all of the time (sometimes slowing or even reversing briefly, but always with a clear long term upward trend).

This is why, as the parent points out, people are forced into the stock market and other forms of investment, above and beyond what they might otherwise choose to invest, simply because the money itself has become such a poor store of value. Nobody in their right mind saves for retirement by hoarding stacks of Federal Reserve Notes. Of course, to even mention that there is something inherently flawed in our present monetary system, the unholy trinity of fiat currency, fractional reserves and a government central bank, is to be branded a reactionary or a crank, but it is nice to see that not everyone is fooled by the "emperor's new clothes".

All so their powerful friends can leech off the hard work of millions of people.

EXACTLY! The politicians don't want honest money, because it would eliminate or at least severely restrict their ability to transfer wealth from the economy at large to politically favored groups with monetary slight of hand. They would be forced instead to use the obvious mechanisms of increasing taxes and borrowing, as they do now, but with much less ability to hide the results of their profligacy by inflating the money supply to compensate (the supply of gold being much more limited than that of computer memory or paper and ink). This would make it more difficult to give money to political favorites who spend it first, before the inflation kicks in, and rob the rest of us of our savings. This is essentially why progressives and others on the Left are almost without exception, vehemently opposed to honest commodity-backed (and especially gold) money.

Failover testing

[Anonymous Coward]

My problem here is the quote "Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges". How can you have unknown entities trading? They have to be identifiable in order to make a trade! Or am I insane?

This is probably just testing by foreign actors to see how hard or easy it is to destroy the market, don't worry about it. Keep you gold under your mattress and everything will be all right.

Re:Failover testing

[hvm2hvm]

Yes, I am wondering the same thing, here's a quote: "And it certainly gets at a central mystery surrounding them: if trading firms aren't sending out these orders, how are they getting into the market?"

Is there a server with a simple API that receives these quotes or WTF is going on? Can I just send some packets to the server and have my quote put up? How can they not know who is sending the requests?

The whole article reminds me of those documentaries on discovery that show you something simple like a cloud that looks like a giraffe and they keep asking "is this just a cloud or is there something that we don't understand about the giraffe cloud?"

Emergent Behavior

[PIPBoy3000]

I suspect that a fair amount of this is emergent behavior - complex patterns from simple rules. For example, if two bots are making test purchases of a stock, one penny greater than the last buy, up to a fixed, you end up getting these odd patterns. The two programmers may not have planned the interaction at all, though they have these weird Game of Life sort of patterns in the data.

Re:MUDs and the Stock Market

[Wonko the Sane]

Exactly.

Re:A Solution to this and the eBay 'sniping' probl

[Anonymous Coward]

The solution to the eBay sniping problem is to operate like a real auction, i.e., when the auctioneer gets a new bid as he is counting down to
close the auction, the closing time gets extended. So, for example, every bid on eBay in the last 5 minutes extends the closing time by 5 minutes. Same rule applies to the new extended closing time. So no one willing to continue bidding ever gets cut off by the clock.

Facinating

[m.dillon]

It looks to me like the orders are trying to match against dark pool bids/asks, and/or all-or-nothing bids/asks. Another possibility is that they are trying to extract non public information from the trading system by purposefully loading the system down and timing responses.

High frequency trading bleeds money away from institutional investors (by sussing out dark pool bid/ask levels) and from market makers (by stealing ETF rebates for volume). Also, most brokerages use fairly simple algorithms to handle market orders which can be sussed out by the more sophisticated algorithms used by the HF traders.

None of this will really effect the retail investor, it amounts to a penny or less on some transactions. Frankly, people have it easy these days where the bid/ask spread is a single penny. When I began trading in my late teens the bid/ask spread was in fractions and was considerably more than a penny. Retail investors get much better pricing these days.

-Matt

Free Market Checklist

[copponex]

You have proposed a solution to introduce more accountability, transparency, or ethical considerations into the free market. Wall Street will not accept your proposal because your solution:

(x) reduces profits gamed from the current flaws
(x) introduces accountability
(x) introduces transparency
(x) introduces ethical considerations

Could it be...

[BigSes]

Some sort of automatic low bid type thing? Let's say you see 50 brand new cars on eBay with no reserve and you automatically bid $10 on every single one, knowing you have practically no chance in winnin, but thinking that one might stand. Perhaps its an automatic feed designed to buy shares of say, Walmart, but only if it hits .30 cents a share?

Re:The reasons are actually well known

[hamburger lady]

problem is, since every other large-scale HFT algorithm does the same thing the benefits are lost. of course, they all have to keep doing it to keep the new equilibrium going.

why hasn't this whole market fallen apart yet?

Mod parent up

[Daniel Dvorkin]

That makes a hell of a lot more sense than any of the other explanations that have been posted. "Never attribute to malice what can properly be attributed to incompetence" -- ideas like shadowy international organizations communicating coded messages through stock trades or self-aware machine intelligences a la Skynet forming on the exchanges are certainly entertaining, but they're not needed to explain this phenomenon.

What is needed, of course, is an explanation of why We The People put up with this crap, when traders and their bots are playing Life not with blobs on a screen, but with our whole economy.

High Frequency Trading Should Be Banned

[careysub]

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.

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.

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.

Re:Is there a chance

[vertinox]

You should pay attention to see if they have competent management, put out quality products, and keep their production in line. If on a daily basis, you notice the stock starting to slip, find out why.

Hrm.... Recently I saw a well profitable small electronics company loose 75% share value in a week. The only reason I could find out was a google search that found that this company was being targeted by short squeezes on forums.

I could have panicked and sold though, but I decided not to look at the share price for a while and its back up to where it was before the squeeze.

Sometimes share prices are being manipulated. You just have to know when.,

When is the game over?

[snowwrestler]

Stocks are a massive game of hot potato. Whoever is holding the stock with the game is over gets burned.

When is the game over? Do you mean when a company declares bankruptcy? (the game is over for that stock) Or when the market falls? (it goes up and down constantly) Or is the entire stock market going to crash and burn? (end of American society as we know it)

I agree that the goal of the stock market is not to maintain wealth--if you just want to maintain, you can't beat inflation-protected Treasuries. The stock market is a way to grow wealth, and the winning strategy is not a secret: dollar cost averaging and low-load index funds. It's not a get-rich-quick scheme, but it will grow wealth if given enough time.

If you're wheeling and dealing individual stocks, yeah, it's more like gambling. But that is only one way to play the stock market.

Re:When is the game over?

[blair1q]

the winning strategy is not a secret: dollar cost averaging and low-load index funds

That strategy gives a moderate return over a certain medium-long term outlook. Provided something large doesn't get involved, like you get in during a marketwide bubble or are forced to cash out in the middle of a marketwide downturn, or both.

Until the fund manager decides to screw you and a fund you picked for its nice upward drift starts trending down and stays that way for several quarters, wiping out years of "gains".

Re:Is there a chance

[vertinox]

Oh the more I re-read your post the more I realized how people who don't even pay attention to the stock market modded you up.

Even Enron and Worldcom didn't tank overnight.

Yes, but you are completely wrong in that they hid their problems from the world to the end. They were rated AAA by Moody's the day they announced bankruptcy. An investor can't protect themselves from companies that cook their books.

Fortunately that is illegal and rare.

An automatic buy order is stupid for the exact same reason. You might set yourself up to snap up a bargain if and when it ever happens, but the problem is, if the stock suddenly drops due to a pending bankruptcy or some other equally devastating reason, you'll get your stock purchase, making some other desperate seller very happy, and never be able to recover the cost.

But didn't you say companies don't go bankrupt overnight?

Obviously putting a limit buy order on say IBM or Coca-Cola is logical because they are not going bankrupt anytime soon.

Re:A Solution to this and the eBay 'sniping' probl

[afabbro]

I've never really understood the complaints about eBay sniping. 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.

You are right in principle, but...let's say I see something now and decide I'll pay $50 max for it. If it sells for $50.01, well damn, I would have paid $50.01. I might not have paid $60, but one cent more?

It's really hard to find the exact to-the-penny point where your "no, I won't pay that" mode is tripped. Virtually everyone will pay a few cents more than their maximum bid - and hence, snipers flourish and cause angst. It's not a case of paying 20% more - that's obvious - it's a case of paying .001% more. Most people can't focus their "maximum that you want to pay" that finely.

It's simple to fix -- tax each trade

[Derling Whirvish]

The solution is simple -- just tax each trade say one dollar per trade. It's not enough to bother the legitimate trades as all of them are for substantially more than a dollar each, usually thousands of dollars each. This would prohibit using the trading system to make a DOS attack on a competitor. Unless you are prepared to pay the tax.

Simpler: tax transactions

[rsborg]

I have a simpler solution to this: tax transactions. Seriously, the London Stock Exchange does it. You don't even have to tax excessively, simply tax each transaction a fixed amount (say $.25) or a very small % (like 0.005%). Why should high frequency trading even be allowed? This tax would also kill automated frontrunning. If churn is the problem, there are ways to slow things down.

Re:A Solution to this and the eBay 'sniping' probl

[Cajun Hell]

I don't see why this is a big deal, though. If you bid $50.00 and it sells to someone else for $50.01, all that happened is that you failed to buy something. For you, that's a neutral outcome, not a bad one. The sniper bought the item they wanted and the seller got a fair price. Everyone either won or broke even. No harm happened to anyone. What's the problem?

Let it ride...

[faulteh]

The market has for the past century been government sanctioned gambling. There has been no real business conducted "on the market", and we all end up having to pay off these problem gamblers. These gambling/market robots are just another part of the game so that "the house always wins". The house are the well known and dodgy investment banks, and of course government eager to take their cut^H^H^Htax.

The problem ...

[atomic brainslide]

... isn't that the mysterious bidders are "testing" the market to see if anyone is selling or buying at outrageous prices. the problem is that the bids being placed are not placed in good faith -- this is against the law in the USA.

the crazy, high-frequency bids are placed and then cancelled at high speed. they act as place holders waiting in line for the price to move in their favoured direction. however, since the vast majority of the time the bids are cancelled, they never execute. this results in the mirage of liquidity and the inevitable "Flash Crash" where sellers come in and all the buyers instantly disappear.

finally adjudicated?

[HornWumpus]

Finally adjudicated? As in bankruptcy?

WTF are you babbling on about?

The * is worth whatever someone will pay for it.

That's right blair1q Enron really was worth all that money way back when (even though it was all fraud).

The money made was green and spent just the same (as long as you were not part of the fraud).

Stocks must be liquid for markets to work at all efficiently.

It's much harder to raise capital for a private corporation vs a public one.

There are several reasons for this but stock liquidity is definitely a feature for all investors (including but not limited to those that get in on IPOs).

It should be noted that most holders of IPO stock were previously holders of private stock (Founders, Angels, Vulture Capitalists etc), not Wall street insiders.

It should also be noted that IPO are 'Initial Public Offerings' not 'Only Public Offerings', companies raise capital with new stock offerings all the time.

I will agree with you that speculators are just gamblers who lower the signal to noise ratio in prices.

I'd tax any market gains from positions held less then a year the same a gambling winnings.

if this is a form of spam ...

[JoeBuck]

... that is, if people are doing this kind of thing to gum up the works for their competition, one answer is to assess a very small fee per trade, less than a penny. This would be completely negligible to a normal investor, but could be quite expensive to those trying to saturate the system for the benefit of their trading algorithm. Market-makers like Goldman Sachs would also wind up paying significant amounts, but given their privileged position which basically gives them a license to print money it's only fair. The fees collected could go into an insurance fund to help cover the next financial meltdown, and if it slows down trading a bit, that may well be a good thing. Complex nonlinear systems have a tendency to go unstable, and damping is one way of decreasing this possibility.

Re:A Solution to this and the eBay 'sniping' probl

[moogaloonie]

If I cut in front of you in line and buy the last of an item you intended to purchase, I am only causing you a neutral outcome. But it is still rude. Notice that people care somewhat less when they are sniped by a bidder who did at one time themselves have a winning bid, than when sniped by a bidder who showed no interest before the closing moments. This is because we use the number of bids and distinct bidders to gauge interest in an item when determining our own max bids. It's not logical (mostly because of sniping) but if I see bidding has slowed on an item with numerous bidders unwilling to go markedly higher than the current amount I can assume that the final price will be within that same ballpark. When there are fewer bidders taking turns having the highest bid, it is likely that one will wait until the very end to actually input their highest bid, which will generally be significantly more than their previous highest bid.

Intent

[zogger]

The intent is to game the system by creating bogus artificial demand-or lack of demand-in large enough quantities to influence trades below. Therefore,because they can do it at such a huge volume, and they know in advance what they are doing, they can use the split they have created to leverage that into a sort of arbitrage all day long. I am *guessing* right now they have to use a partner trader/bot to do the actual "real" trades following the bot shilling. Like secret partners in a poker game.

My opinion, crooked leeches, parasites, this sort of trading should be outright banned. I'd also like to see sales tax put on trades, we simply don't need this high speed trading at all, and that would be the simplest solution to this whole mess.

Would it reduce churn and volatility? Yes it would, not eliminate it, but slow it down enough to make it so actual human beings had to stop and think on what they want to do, and it would force a return to investing in a company, rather than this casino action we have now.

also see this, it's just a high tech variation: http://en.wikipedia.org/wiki/Front_running

Economy 2.0

[qeveren]

This is starting to remind me of Charles Stross' Accelerando, and that worries me. XD

Re:A Solution to this and the eBay 'sniping' probl

[PybusJ]

Sure, there is a somewhat fuzzy edge between what you consider a fair price and the price at which you're not interested. Also, humans are not particularly rational beings. Combine the two and auctions can easily lead to someone paying over the odds.

You decided that $50 was your top price, but see that someone has bid $50.01. That's not worth losing over; you bid $50.05 (or whatever eBays minimum increment is); your competitor ups hers. This keeps on going for a few rounds (after all if it's worth $50 it's probably worth 20-30c more). But by now you've become emotionally involved: you've invested effort in making these bids, if you back down you'll have the negative feeling of having lost, rather than the neutral feeling of some item costing more than you wanted to pay. Before you started out you might have thought it was worth $50 but not $52. With little time to respond, and in the competitive auction environment, you don't make the same judgements and keep bidding one of you finally wins at $61. It then turns out you could have bought the item from another fixed priced seller for $55.

You see this a lot on eBay; it's good for the seller, but not for buyers. So much more rational to take advantage of eBay's Vickrey auction style proxy bidding. Bid your maximum and if you win you only pay for one increment above the 2nd choice person. Don't choose a round number, if the item is worth about $50 but not $52, pick a random number somewhere in between, say $50.73. If you win, great, if not you don't feel too bad about it -- it's not like the 50 vs 50.01, you've already given yourself a little margin.

In theory this is a good strategy but it doesn't take account of the pool of irrational eBayers, and the outright cheats. If you leave your best bid up a long while before the end, a couple of bad things might happen:

    1) shill bidders (the seller, or someone in league with them using another account) may come and bid up the auction so you pay more than you otherwise would. They may even bid past your limit thus finding out your maximum, then cancel the bid and bid to just below your maximum. EBay don't allow it, but it happens where they don't spot it.

    2) Someone may come and think it's worth $45, bid that and see it doesn't win. Reason as you did, and bid a little more, then a little more again. Now they're the one's getting emotionally involved and keep bidding thinking "just one more and I might be in the lead", eventually bidding themselves up past you even if they wouldn't have considered the item worth it.

Best to avoid this entirely, bid what you think's a fair price close to the end of auction. If others have done the same, and bid their maximum (you know, just like eBay suggest in to) then they won't be unhappy.

Hence snipping. Perfectly rational, and only a disadvantage to buyers who, for some reason, like to bid up incrementally instead of using the eBay proxy bid system.

I really can't see why buyers complain so much about it. Of course it's not in seller's interest, they benefit when people get carried away bidding.

Re:A Solution to this and the eBay 'sniping' probl

[Anonymous Coward]

Why is he being tagged INSIGHTFUL?

>For you, that's a neutral outcome, not a bad one.
Financially it was a neutral outcome. You're right about that. But it is also a BAD outcome - you WANTED something just enough to bid on it, and you didn't get it by a few cents. I would call that bad. Have you ever been on the receiving end of a sniper? Didn't think so.

>The sniper bought the item they wanted...
at the first bidder's expense. The first bidder took the RISK of being outbid by setting the initial bidding price. The sniper just had to wait it out and offer a FEW CENTS more, with NO RISK of being counterbid on an underpriced item.

>...and the seller got a fair price.
Nice of you decide what a "fair price" is. I think the seller would have liked to be on the receiving end of a bidding war. Isn't that what an auction is all about? The sniper also agreed that the current bid price was too low, otherwise why would he have sniped? The sniper COULD have bid higher hours before the end of auction, but this would have involved RISK of being outbid.

>Everyone either won or broke even.
Not true - only one person won, the sniper. The seller left some money on the table by selling low to the sniper.

>No harm happened to anyone.
Again, not true. The seller didn't get the best price and the original bidder didn't get an opportunity to offer a better price. The sniper wins by technicality.

E-bay's way of doing an auction is not quite like the meat-space auction. In meat-space, there is no time-cutoff for the auction, only price. The auction continues until no counterbids are offered, and the last bid wins. This, however, requires a mediator to announce the end of the auction to all bidders; "going once, going twice...sold". I'm certain that the cut-off time method was chosen at E-bay because it is cheaper and easier to implement, but not necessarily fairer.