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Flash Mobs of Trading Robots Coalescing To Rule Markets

Posted by samzenpus on from the john-henry dept.

An anonymous reader writes "Financial markets experienced a series of computer glitches recently that brought operations to a halt. According to a researcher at the University of Miami, mobs of ultrafast robots, which trade and operate at speeds beyond human capability, may be responsible for these "flash freezes". From the article: '"Even though each trading algorithm/robot is out to gain a profit at the expense of any other, and hence act as a predator, any algorithm which is trading has a market impact and hence can become noticeable to other algorithms," said Neil Johnson, a professor of physics at the College of Arts and Sciences at the University of Miami (UM) and lead author of the new study. "So although they are all predators, some can then become the prey of other algorithms depending on the conditions. Just like animal predators can also fall prey to each other." When there's a normal combination of prey and predators, he says, everything is in balance. But once predators are introduced that are too fast, they create extreme events.'"

22 of 251 comments (clear)

  1. Should be a tax on every transaction by Anonymous Coward · · Score: 4, Interesting

    Every time I buy a stock or sell one, the IRS and other taxing authorities suck some money out of me.
    When these computers buy and sell shares several times a second, they do not get taxed. That is not fair.
    There should be a tax maybe .001 cents per transaction. That would cut the amount of chatter and computer predation.
    Some of these systems see what slow dim you are going to buy, jump ahead of you in line, buy it and then sell it to you.
    You do not get the best price, they get a profit. If they were taxed on both ends of that, they would not do it and you would get a better price.

    1. Re:Should be a tax on every transaction by khallow · · Score: 3, Insightful

      Every time I buy a stock or sell one, the IRS and other taxing authorities suck some money out of me.

      When these computers buy and sell shares several times a second, they do not get taxed. That is not fair.

      I'm pretty sure the IRS gets their cut too. But they get a cut of profits just like they do of your profits.

      There should be a tax maybe .001 cents per transaction.

      Why? No one has explained why anything needs to be done at all. It's all "rich people are making money therefore we need to screw it up for them".

      That would cut the amount of chatter and computer predation.

      And why is that considered a good thing? I think we need more chatter and computer predation.

      Some of these systems see what slow dim you are going to buy, jump ahead of you in line, buy it and then sell it to you.

      No, they don't. They don't have ESP. They can't see what you do on a market before you actually do something on the market.

    2. Re:Should be a tax on every transaction by Thanshin · · Score: 3, Interesting

      When these computers buy and sell shares several times a second, they do not get taxed. That is not fair.

      Laws aren't made to be fair.

      There should be a tax maybe .001 cents per transaction. That would cut the amount of chatter and computer predation.

      That would go against the people who make the laws.

      Some of these systems see what slow dim you are going to buy, jump ahead of you in line, buy it and then sell it to you.
      You do not get the best price, they get a profit. If they were taxed on both ends of that, they would not do it and you would get a better price.

      And that's the reason for such tax not to exist. Because you getting a better price is not the desired outcome.

    3. Re:Should be a tax on every transaction by Anonymous Coward · · Score: 5, Insightful

      Why?

      Because we, the people, end up bailing out these irresponsible fuckers who have turned Wallstreet into a casino. The next bailout better be paid in advance by those who caused it, hence a tax on gambling with stocks.

    4. Re:Should be a tax on every transaction by alexander_686 · · Score: 3, Informative

      No, they are taxed on their profit. They are even taxed on their potential profit. “Trading Positions” are taxed on their unrealized loss at the end of every year. So in fact they have to pay more profits.

      And there has been a lot of debate on the effect of a Tobin tax the actual effect has been less then advertised. When France introduced one last they got more volatility, lower liquidity, and higher spreads. The last 2 imply that the middle men (such as HFT) were making more money per trade and “stealing” more profits from small stock traders.

    5. Re:Should be a tax on every transaction by Thanshin · · Score: 4, Insightful

      Because we, the people, end up bailing out these irresponsible fuckers who have turned Wallstreet into a casino.

      Did you decide to bail anyone?
      Did you have any choice in whether to bail them?
      Did you have any power at all?

      We, the people, didn't bail anything nor anyone. We were robbed of a fraction of our production by the powerful and THEY bailed the banks, because THEY are the ones with a lot of money inside those banks.

      The next bailout better be paid in advance by those who caused it, hence a tax on gambling with stocks.

      The next bailout will be paid by the government. And the people have no money, nor voice, nor power to stop that.

    6. Re:Should be a tax on every transaction by fuzzyfuzzyfungus · · Score: 5, Insightful

      Please, don't disparage the good folks in the probabilistic entertainment area of the hospitality sector by such comparisons.

      Casinos may be tacky; and they do suck some gambling addicts dry; but their danger to the larger economy, and to parties who don't choose to deal with them, is quite minimal. Even better, because of their tackiness and the widespread knowledge of how foolish it is to work with them when greater-than-recreational amounts of money are on the line, nobody proposes massive bailouts, or handing social security over to them to manage!

    7. Re:Should be a tax on every transaction by khallow · · Score: 4, Funny

      They don't have ESP, but they can see buy orders before they are executed.

      Then that's insider trading. The US has laws on the books for that.

    8. Re: Should be a tax on every transaction by tolkienfan · · Score: 4, Informative

      I know of no pure HFT company that was bailed out. Some banks have HFT divisions, but that's incidental to their problems and eventual bailout.

    9. Re:Should be a tax on every transaction by bmxeroh · · Score: 3, Interesting

      No, what the poster above is referring to is a form of arbitrage. Admittedly, it doesn't sound like the average person is affected by this so much as large block orders placed by big companies, but it absolutely happens. The issue is that these very large orders take a significant amount of time to complete, and the HFT algos have plenty of time to see what is happening, buy up a position and sell it as the price is going up due to the large purchase. It's not about large profits, remember this is High Frequency Trading, so all they have to do is take advantage of very small price differences a gazillion times a day to turn a hefty profit.

      --
      Central Ohio Home Theater Installation - The Theater People
    10. Re:Should be a tax on every transaction by Anonymous Coward · · Score: 5, Interesting

      No, they don't. They don't have ESP. They can't see what you do on a market before you actually do something on the market.

      Actually they do have esp.
      They can see what order you have placed before it is fulfilled.
      Have you not heard of level 2 market data.
      Pay for it and you can see what orders are placed - volume, bid/ask price, trading organisation.
      Combine that with super high speed connections to the exchange and you can see transactions at the millisecond and act on them.

      Off topic:
      If you've ever traded you may have spotted the effects of high frequency when using candlestick charts at the 1 minute timeframe.
      You will see long repeated sequences of Bull Candle, Bear Candle of the same size over a short time scale (seconds)
      Thats proof of Banks and institutional traders bots / algorithms fighting for price power.

      8 Years ago you would be lucky to have spotted a dozen a year.
      Nowadays there's one everyday if you know which instrument to look at.

    11. Re:Should be a tax on every transaction by khallow · · Score: 3, Insightful

      As long as there's risk, it's not arbitrage. A small risk over thousands or more orders can become a big risk. And the AC didn't say "big orders". And even a human market maker can move fast enough to exploit big order trading. That was as I see it one of the big reasons why some people could make money at day trading, for example.

    12. Re:Should be a tax on every transaction by lxs · · Score: 5, Funny

      Being European, I prefer 1789. Off with their heads!

    13. Re: Should be a tax on every transaction by Rockoon · · Score: 3, Insightful

      To be quite complete, all trades happen at an agreed upon price and if the HFT algorithm is involved its because its got the current highest bid or lowest ask out there.

      You will notice that nobody ever has anything to say about this fact being somehow bad. The arguments, 'cept for one, is indeed a combinations of "its evil algorithms" hand waving and "its evil rich people" hand waving.

      The one valid argument is that the markets sometimes halt trading and undo previous orders, and since HFT's hit the scene its always been because of HFT's. The solution isnt to stop HFT trading... its to stop these do-overs that prevent algorithmic traders from taking very large losses: Market regulation has distorted the true risks. Restore the true risks and let the bad HFT's fail big once in awhile.

      Simple.

      --
      "His name was James Damore."
  2. So far removed from anything useful for society! by Rosco+P.+Coltrane · · Score: 5, Interesting

    This sort of financial activities is complete economic nonsense, as it brings nothing of value to people, companies or other concerns that actually produce something useful to society as a whole. Just reading the /. blurb should be enough to convince anyone that "robot trading" is a parasitic activity that should be taxed to oblivion - by ways of a tax based on the speed of trading for instance - and financial markets forced to become what they're supposed to be: places for investors to invest in real economic activities for the long haul.

    --
    "A door is what a dog is perpetually on the wrong side of" - Ogden Nash
  3. Re:So they get to play computer games by Thanshin · · Score: 3, Insightful

    So they get to play computer games, where the victims are ordinary people's savings, pensions, etc.

    Only if those people give them their savings to play with.

  4. With apologies to J. Swift... by fuzzyfuzzyfungus · · Score: 3, Insightful

    The vermin only teaze and pinch
    Their foes superior by an inch.
    So, naturalists observe, a flea
    Has smaller fleas that on him prey;
    And these have smaller still to bite 'em,
    And so proceed ad infinitum.

  5. Predatory investing? by Culture20 · · Score: 4, Interesting

    Investment is a collaborative strategy, a symbiosis. Programming "investment bots" to be predatory is not a good thing. It introduces parasites into the mix.

  6. Ho Hum - the exchanges are the biggest crooks by FriendlyLurker · · Score: 5, Interesting
    The flesh-and-blood sharks were thrown in jail (overnight, litrally) convicted of fraud many years later and given a tiny slap on the wrist compared to their actual crimes. This not done in the name of justice, but part of a larger power struggle to take the NYSE electronic (the families that had operated the NYSE for 200 years were blocking the move, shit started to hit the fan around 2003). The exchange specialist were only accused of skimming off the top for a short period of time, but everyone familiar with this practice knows that it goes back to 1970's and most likely well before that (Richard Ney called them out for skimming off the top in his best selling book The Wall Street Jungle around 1970), Richard Wyckoff talked about the principles & techniques of stock market manipulation (by the exchanges) it as far back as early 1900's). Since 1970 that are billions of dollars skimmed off the top - no investigation until a power struggle. The practice goes on today and it is the electronic exchanges that benefit instead of the NYSE specialists. Any talented stock market data analyst can confirm this by taking NYSE data pre electronic exchange data and comparing their "skimming" techniques as confirmed in the court case against the electronic data. Wyckoff became very wealthy living off the crumbs of the exchanges ill-gotten gains.

    All this news is underlining is that the exchanges are having more of their crumbs stolen by independent parties... if you want reform, start with brining transparent to the stock marker exchanges and their skimming off the top practices. The cost to society is enormous.

  7. Robots? by Anonymous Coward · · Score: 3, Funny

    Robots? Really??

    So Robots physically stormed into the NY Stock Exchange and took over trading?

    Please, for the love of Terminator, please stopping calling programs "Robots"... "bots" are bad enough but can be overlooked but do not call them "Robots".

  8. Hopelessly Naive by GlobalEcho · · Score: 5, Insightful

    Consider the following quote from the paper

    Since both crashes and spikes are typically more than 30 standard deviations larger than the average price movement either side of an event (see Figs. 1A and 1B), they are unlikely to have arisen by chance

    This statement implies that the authors believe a gaussian model "should" apply to the market dynamics. As Benoit Mandelbrot and many others before and after him point out, financial markets never have followed gaussian dynamics and they probably never will. It's especially silly because they go on to analyze the distribution of Ultrafast Extreme Event (UEE) sizes as a power law.

    Today's market has both accumulation algorithms now used by mutual funds and other sophisticated "buy and hold" investors, and market-making algorithms used by HF firms, and I fully believe there is some interesting dynamics arising from all that. Whether it is any weirder than the slower, human-derived, dynamics of yesteryear is still in doubt. Humans are so much more complex than any of those algorithms that I suspect if you examined the market behavior in 1980, and sped it up, you would see plots wilder than anything Nanex produces.

    The paper is somewhat interesting, but not very convincing.

  9. Re:So, we've gone from ... by Russ1642 · · Score: 3, Informative

    Botnets are a coordinated networks of computers under a single malicious control. However, these trading 'robots' are individual computers under malicious control. They may seem like they coordinate with one another but they operate completely independently, reacting to the market not to some master controller.