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Pentagon Turns To High-Speed Traders To Fortify Markets Against Cyberattack (wsj.com)
Slashdot reader Templer421 quotes the Wall Street Journal's report [non-paywalled version here] on DARPA's "Financial Markets Vulnerabilities Project":
Dozens of high-speed traders and others from Wall Street are helping the Pentagon study how hackers could unleash chaos in the U.S. financial system. The Department of Defense's research arm over the past year and a half has consulted executives at high-frequency trading firms and quantitative hedge funds, and people from exchanges and other financial companies, participants in the discussions said. Officials described the effort as an early-stage pilot project aimed at identifying market vulnerabilities... Participants described meetings as informal sessions in which attendees brainstorm about how hackers might try to bring down U.S. markets, then rank the ideas by feasibility.
Among the potential scenarios: Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash... "We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets," said Wade Shen, who researched artificial intelligence at the Massachusetts Institute of Technology before joining Darpa as a program manager in 2014.
Among the potential scenarios: Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash... "We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets," said Wade Shen, who researched artificial intelligence at the Massachusetts Institute of Technology before joining Darpa as a program manager in 2014.
Dedicated backend links with DoS mitigation, elimination of high frequency trading, moving instead to an x second or x minute tick with all incoming orders either randomly assigned service order, or organized by buy/sell price, to help mitigate timing based attacks?
The current system seems built for cheating/gaming the system, so rather than trying to solve a social/legal problem with a technical solution, how about solving the underlying cause and scale back trade timing to human accessable values?
No, you are simply wrong.
What you describe is only possible with "front running" where an actor can intercept orders before they are placed on the queue and made publicly available.
If everyone only has access to orders after they are on the queue, and publicly available, then the (let's use) HFT operators can only either improve the buyer's opportunities by placing a sell order at a lower price than the existing orders, improve the seller's opportunities by placing a buy order at a higher price than the existing orders, or have no effect at all.
You don't trade.
You are correct in describing the Okain Warriors story as "front running" which is not how HFT trading works.
However, HFT's price discovery mechanism of placing and cancelling numerous orders to discover the range of buy and sell order prices before that knowledge reaches the other investors, and then to arbitrage that knowledge is what bothers people. It results in the HFT people having special knowledge that the actual buyers and sellers do not have, and due to their arbitrage, it result in the seller NOT getting the optimal price, and it result in the buyer NOT getting their optimal price. Sure, it brings the prices closer together, but that is NOT what actual buyer and seller wants, nor does anyone else who is trading based on fundamental values of stocks.
What we most object to is the placement and cancelling of orders to do price discovery. To my eyes and many others, although it is not actually quote stuffing because it is seeking to do arbitrage within actual buy/sell orders, it so very much looks like quote stuffing behavior.
Furthermore it is way too easy to do quote stuffing while disguised as price discovery, and the people have been caught doing that.
I'm not objecting to HFT per se - there's much more to HFT than just price discovery and arbitrage, but I do claim that a business model that depends upon placing orders that are intended to be cancelled is unethical and should be outlawed.
If you did this in person with another person it would be considered to be deceptive to offer to buy and to offer to sell the product knowing that you intend to not fill these orders. This is why people are uncomfortable with the practice.
Consider what would happen if, in the pre-computer days, people sat next to the brokers desk (without actually seeing the brokers orders) and placed a constant stream of buy and sell orders, watched the ticker tape, but cancelled them all before they were executed except for the most favorable one. They could do that if they sat next to the broker.
The broker would not put up with that because it would be unfair to his other clients, and the specialist surely would not be happy to be part of it. Historically people have tried to do variants of this and no one thought it was OK.
But for some reason it's OK if you do it with a computer.