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:

[Sir_Lewk]

Believe it or not, I'm not sure that explains these weird robot trades at all.

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:

[Wonko the Sane]

Karl Denninger has been reporting this problem for a few years now.

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:

[stonewallred]

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.

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:

[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:

[Wrath0fb0b]

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.

Secret messages

[Arancaytar]

The machine intelligences are communicating through hidden channels in our global network.

Judgement Day is close.

Nothing to be concerned with...

[gilroy]

... it's just SkyNet looking after its retirement holdings.

Re:Nothing to be concerned with...

[sammy baby]

"It becomes self-aware at 2:14 a.m. Eastern time, August 29th. By 3:44 am, it has a comfortable nest-egg and is on track to retire early, perhaps with a nice condo in Hernando, Florida."

Re:Nothing to be concerned with...

[mhajicek]

It won't kill us, it will buy our debts and subvert us into slavery...

Is there a chance

[bugs2squash]

That the trades are trying to trigger "limits". ie. Someone may have pre-programmed a system to automatically dump stock if the price tanks, so when one of these trades comes in the price looks as if it is tanked, the stock sells and the buyer snaps up a bargain.

Re:Is there a chance

[Anonymous Coward]

Alternately, they could be testing the elasticity of the market for that stock. Remember back to econ 101 and the price/demand curves? The assumption was they are smooth curves. In reality, they have stair-steps. And sometimes the steps are big, and sometimes they are small.

By teasing out the fine grain elasticity of a stock, you can make some predictions. There's always going to be some jitter in price. But if you know that demand is pretty weak until a stock drops 50 cents, you set up your trades to take advantage of a likely 50 cent drop that day. Same if there is higher demand than availability. Get ready for a price jump.

Re:Is there a chance

[Restil]

This is why people shouldn't set automatic limits. Of course, it's kinda silly even under normal circumstances. If you have money invested somewhere, you should pay attention to it. You should pay attention to the health of the companies you are invested in. 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. Even Enron and Worldcom didn't tank overnight. There was plenty of time to realize that there was a problem brewing and get out without some artificially set "limit" to sell the stock automatically. Besides, when the fit finally does hit the shan, and your sell order isn't hit until after that point, there's a chance you won't get anything near what you're wanting, since nobody will be buying at that point.

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.

-Restil

Flood attempts?

[pesho]

This looks like high frequency traders have moved on from just gaming the market and now are trying for flood each other with bogus data hoping to trigger a bug in the competition's software or simply overwhelm it.

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.

[afabbro]

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.

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

[TrippTDF]

I agree with you -

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. 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?

I don't have a solution, and I also have money in the market, but the core purpose of the market has been wildly changed from what it is designed for.

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.

[Anachragnome]

In his economics class, my son had an interesting assignment. The instructor gave each student 10,000 "dollars" (it was a simulation) to invest in any stock(s) they wished.

A month later, the class did all the math and found out how everyone fared. My son was the only student that had returns on his investment.

He simply looked at the market as a whole, then made a single decision. The market was in a long slump (the beginnings of the current recession) and he invested every single dollar into Anheuser-Busch. Beer. My son described it as the "Woe-is-me Effect"--often, when people have money problems, the first thing they do is drink. He also pointed out that this is exactly how the wife of Senator John McCain makes her money--moving it in and out of her own beer distributorships as the market fluctuates (moving her money back into her own companies stocks when the rest of the market is hurting--Beer for everyone!).

The only other student that didn't lose his pants was a student that spread his investment money across as many stocks as possible. He was just short of breaking even. The losses almost averaged out the gains, but not quite (makes sense in a declining market).

While algorithms may help in ways, they do not come close to basic HUMAN intuition. We see things computers do not.

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

[rwa2]

Word.

Any trade where your purpose is to make money out of money seems pretty pointless to me. But I'm an engineer, so I certainly don't see the world the same way as a business/finance geek would. But as long as the finance geeks and politicos are jerking each other around, they're presumably not bothering anyone else (until they fuck shit up so much that it's time to tell them to go sit in the corner for a while).

Warren Buffet seems to have good investing advice I can appreciate.... invest in what you know; what you want to succeed, and do it for the long term. I can jive with that... then even if your investments lose money, it at least went to what you consider a worthy cause.

I put a portion of my savings into my company stock, because I want to show that I'm personally invested in my employer. I know it's not a good idea to put too much in there in case it tanks, in which case you'll be out of a job and a retirement. So I make sure most of the rest of my money is in a diversified index fund. Usually the index funds with low fees, because they don't perform all that worse than "managed" funds, and I don't care to reward the stock fund "managers" for being succeeding at being greedy.

I usually choose the international index funds, if only to promote peace through cross-investment. Also I think the US dollar will likely fall during my lifetime. And if it doesn't, well, then I've still got plenty of strong dollars in savings. Plus, most of the easy growth is probably in developing international markets anyway. I don't care to try to "win big" by catching the next Qualcomm or Apple, because they could probably succeed without my help, and they'd probably make most of their ill-gotten gain through means I don't approve, like patents and lawsuits and technological lockout.

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

[blair1q]

I disagree.

The stock market exists to marry suckers with the people who put their capital into businesses.

You will likely never get the opportunity to do so.

When you trade in the stock market, you are paying off people who hold stock, not putting your money into the company whose shares you are buying. Your willingness to buy them gives the true investor confidence that he can lay off his risk in his investment by selling you the company at a time of his choosing. This in turn inflates the amount he's willing to risk in the company. That does not mean you are investing. It means you are helping to inflate the market value of companies well above their true risk.

Which means that investors don't have to work as hard to determine the viability of a company, and in fact don't care how well it will do, only how well it sounds like it will do. Which means many companies that shouldn't exist are brought into being, and sold to you as great "investments".

Now, there are ways to get value from the company itself for your shares. Divedends, commonly. Very, very, very rarely you will get a cash disbursement when the company ceases to exist. You will more often be given different shares of stock or cash when the company is acquired by another company. But you will also often be given a notification that your stock is worthless and the company has been delisted in a bankruptcy proceeding. And you get to vote on company referenda. Although there are other individuals who get to vote a hundred thousand times for every one of your votes. And some of those don't even own the class of stock you own, or as many shares.

The stock market is not investing. It is speculation. It is a pure application of the greater-fool theory, plus the imagined hope that somehow openly buying and selling items that are priced by random decisionmaking will estimate the "true value" of a company, something that, so far as I've been able to research, has never actually occurred. When the value of the company is finally adjudicated, the market price is either 30% too low or 100% too high. In between, nobody with inside information is even marking the price to the company, because they're not allowed to trade. The stock market is legally bound to be ignorant of the facts. And that makes it eminently unqualified to be involved in investing.

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

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

[Wrath0fb0b]

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

You are welcome to bet against the US repaying all its debts on time and as promised. That's the beauty of the stock market -- for every position there is a counter position betting on the opposite result. What's more, the contrarian that is right makes huge profits. Given that the US Treasury has no problem auctioning off large batches of US securities at crazy-low interest rates, there are lot of people quite confident in that full and on-time repayment so you stand to make a mint if you bet against them and are correct.

$20 says you aren't going to put your money where you mouth is though.

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

[blair1q]

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.

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.

[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.

Corewars with money

[vlm]

Its corewars, but with real money instead of simulated computer memory.

http://www.corewars.org/

The name of the game is to send a "signal" that confuses the other guys bots, such that you fool them into making you money.

Very much like aircraft radar guided missiles vs radar jammers vs anti-jamming missiles

It's all about the Candlesticks Jack

[Anonymous Coward]

They're obviously designed to manipulate trading volume in order to fuck with the church of technical analysis believers.

When you understand how the spread of ask/bid prices impact candlestick charts, and subsequently: the market's perception of bullish and bearish indicators, you can see how sinister this really is.

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks

Re:It's all about the Candlesticks Jack

[afabbro]

They're obviously designed to manipulate trading volume in order to fuck with the church of technical analysis believers.

Scientology makes more sense than the ridiculous nonsense that is technical analysis.

"We have here a classic head and shoulders pattern as CSCO is showing support at 23 and some resistance at 25. I'm looking for a breakout once 25 is tested for the third time with momentum in a birthday cake trend over the next four periods..."

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

[bertoelcon]

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.

Re:Nope, it's right on

[digitalhermit]

The biggest traders can use bogus trades to get an idea of what price a stock is able to bought/sold at. With sufficiently fast systems -- i.e., ones tied directly into NASDAQ, NYSE, etc.. -- they can make millions of dollars extra than if they didn't have this knowledge. And it's legal...

Re:Nope, it's right on

[mestar]

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.

Re:Nope, it's right on

[RingDev]

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.

To use the face to face analogy, it's like two people trying to negotiate a deal when a third person comes up and starts screaming at one of the parties. While the subject is still recovering from being screamed at, the other parties make the same deal that the offended party was about to make.

-Rick

Re:Nope, it's right on

[TooMuchToDo]

Holy shit. It's like ebay snipping but with real money!

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

[pyite]

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.

Re:Nope, it's right on

[Princeofcups]

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.

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.

A Solution to this and the eBay 'sniping' problem

[MarcQuadra]

I have a simple solution for problems that could be caused by these high-speed robots doing the trades, and also for eBay's 'sniping' problem (where your item sits for days untouched, and then the bids all land in the last thirty seconds).

Just add some 'fuzzy logic' to the time things happen. eBay auctions would randomly end 'between 10:05 and 10:10", forcing snipers to bid before the end of the trading. Same for the stock market, just have trades execute, by law, on a 'random' basis within a certain time period after they're filed. I'm not sure what the right balance between stability and liquidity is, but I'll guess that a two minute window would discourage most high-speed trading.

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

[vlm]

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.

Um, no.

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

"Most importantly, usury is the derivation of profit from biological time, which is linked to life, considered sacred, God-given and divine ..."

It all boils down to charging people for "god given time". The church does not want bankers moving in on their turf. Peasants should worry about worshiping on time, not paying the mortgage on time. Bankers should not be charging money for "gods Sunday" or for that matter any day because god made the sun rise in the morning, not the banker. Or in summary, God gave you 30 years to live so you can worship him, not pay your banker.

That explains why some religions tolerate a fee-based-structure for interest (I give you $10, you promise to gimme back $11) as opposed to a percentage over interval based structure (I give you $10, you owe me the original $10 PLUS 5% of that per year). Most religions tolerate trade (even if the exchange seems a bit uneven) a heck of a lot better than they tolerate fooling with who owns/controls time.

I'm not religious at all, but even I know this is the "correct" interpretation. Not that I disagree with your result or goal. Its just that you're totally on the wrong path of reasoning.

Re:Free Market = good; Capitalism = Usury

[DougF]

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...

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"]

Correct the market

[Anonymous Coward]

High frequency trading is an abuse of the system. Stop it, take the market away from gamblers and return it to investors.

Just proves amateurs don't know...

[Giant Electronic Bra]

This is not 'weird' at all. It's just one bot trying to fool another by making it think there is excess liquidity on one side. Oldest trick in the book. Also entirely against the rules. So it proves there are slugs out there gaming the market, but there's no question about WHAT they are doing, that's perfectly transparent.

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

[Anonymous Coward]

If you hold a stock for more than a few microseconds, you're labeled a "f*cking camper" now.

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.

MUDs and the Stock Market

[Renraku]

Back when I used to play MUDs, I remember setting up triggers in Gmud. I idly thought to myself, "What if I could do this with the stock market?"

Back when I used to play World of Warcraft, I remember all the auctionbots people would set up to automatically undercut you down to one copper over what was profitable. You could search for a specific item, see one person selling it for say, 1000 gold, put your item up for 990 gold, search for that item again, and see that all five of their items up for sale are now 989 gold and 99 silver. If you set it somewhere absurdly low like 500 gold, it would be bought out by a bot within seconds of posting it. Of course, after buying it, their prices were back to normal. Of course botting is illegal in World of Warcraft.

Again, I applied this thinking to the stock market. What if you had bots to buy if the price was favorable for very popular stocks, but they could manipulate the market to make the price favorable? This kind of manipulation can and will lead to some dire consequences as people no longer act predictably for fear of the bots manipulating them.

Re:MUDs and the Stock Market

[Wonko the Sane]

Exactly.

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

[Chad Birch]

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.

Even if it is an actual problem for some reason though, 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.

The reasons are actually well known

[brian0918]

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.

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?

Re:The reasons are actually well known

[brianerst]

It actually doesn't need to be that nefarious (of course, it could be).

You see a lot of this sort of thing in the derivatives markets (I work in the industry - I was the lead architect of the CBOT's Order Routing System) and it's caused by auto-spreaders. A spread trade in derivatives involves finding a pattern between two or more products and trading the differential in prices (e.g., the March Corn contract and the June corn contract tend to move largely in sync, but the spread between them can grow and shrink, so you combine a buy and a sell when the spread narrows and a sell/buy when it grows again).

Most of the easier kinds of spreads are handled natively by the exchange trading engines - they imply prices into and out of the underlying contracts and trade the package of contracts as an atomic unit. But someone who wanted to trade non-standard spreads (like those across exchanges, for instance NYMEX energies vs. ICE energies) has to do it differently - you have to create a synthetic spread by watching the prices of the underlying products and "legging in" the different products you want to buy or sell when your price target is reached.

The easiest and least sophisticated way to do this is to wait until your prices all line up (say you want to buy the NYMEX Oil contract for 10 cents less than you sell the ICE Oil contract for) and then throw in market orders. Then you wait for the spread to move and throw in market orders when you're in the money (you sell the NYMEX Oil contract for 12 cents more than you buy the ICE Oil contract for). Bingo - you make money and you don't really care what either contract was really "worth" - you just care about the differential.

Problem is - market orders suck. The price can move away from you (screwing your differential) and you end up behind all the limit orders that were in before you (increasing your chances of a price movement). So, the smarter way to do it is to place part of your order into the market as a limit order that tracks against the price of the other market. As that market moves, you cancel/replace the leg or legs that are "in the book" so that you stay in sync with your overall strategy. If your "in the book" order(s) starts to fill, you know you've hit your target and you can drop the final part of your spread into its market, giving you a much better chance of getting your differential.

Now, imagine that you are doing a pretty complicated spread (four or five different underliers that all relate in some model you have) - depending on which ones you put into book and who else is spreading slightly different contract combinations, you get a lot of weird orders being inserted, canceled and replaced at prices all over the map. It can appear semi-random, but for each algorithm, it actually is highly deterministic.

I don't know if that's what's going on here, but I wouldn't necessarily rule it out. A number of exchanges (including the CME) are trying to stop this sort of thing, because the transaction volume going into and out of the exchange (and the associated price changes that need to get pushed out) is hugely expensive. So, these days you have to maintain a certain ratio of orders to fills (i.e., don't cancel or replace a lot) or you start to get fined.

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

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:High Frequency Trading Should Be Banned

[khallow]

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).

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?"

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: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.

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?

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.

Re:It's called freedom to do business

[BoberFett]

So if you went to the grocery store and as you were about to check out, some guy jumped between you and the register and emptied your cart without you or the cashier asking them to do that, you'd pay him for it?

That's what these HFTs do.

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.

Re:finally adjudicated?

[RingDev]

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

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.

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

Re:Intent

[tsm_sf]

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.

Re:Intent

[Spazztastic]

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.

Except that is enforced. Manipulate the in game economy too much and you'll get banned, at least in WoW you will.