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.

Comments

Wouldn't the real solution be:

[Anonymous Coward]

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?

Re:Wouldn't the real solution be:

[Procrasti]

If people actually understood the stock market from the game theoretic point of view that it is designed as, they would see that no order can be placed to the detriment of any other actor's orders, and that in fact, every order either increases the value of the market to *some* set of actors in that market or at worse has no effect at all.

There is no such thing as a market order that can unfairly affect anyone else's position in the market (with the exceptions of insider trading and front running, both of them are rightly illegal).

The "fixes" people propose to the market actually tend to make it worse. For example the, "best execution" laws have made the system worse, as they have attempted to implement the physically impossible by force of law, where simple arbitrage already provided the mechanisms and market incentives to do this. (As a result of this "fix", something like front running becomes possible for the select few).

Slowing down the market like you suggest is another unnecessary and actually harmful solution to a system that is specifically designed and intended to provide instantly up to date prices that reflect all known information about a stock, in the limit (the efficient market hypothesis).

Actually allowing the stock market to operate as it is intended, with all the price volatility that involves, is actually the best available option. Those who correctly act against that volatility will profit.

One more example, there is a law that states an order cannot be placed that you do not intend to fill. A couple of uni students saw patterns and vulnerabilities in HFT bots, that reacted to large orders that were taken down after the uni student's own bots ate up the orders the HFT bots placed in response to them. The market moved wealth from the inefficient HFT bots into the hands of the more efficient uni students just as it is designed to do. However, this upset the HFT bot owners (Goldman Sachs and co)... so the uni students were arrested, charged and imprisoned, instead of being rewarded with the millions they rightfully earned. The IRONY of all this is that the HFT bots place and cancel many thousands of orders per second... but they are owned by ultra rich people and this is not a free market, but crony capitalism.

The correct answer to this, although highly unlikely, is for people like you to learn how these things are meant to operate and understand them before you suggest ideas that actually cause harm instead of solve problems... I guarantee you that a "solution" like this will result in even more money for the likes of GS and co at the cost of everyone else.

TLDR; Learn microeconomics.

Re:Wouldn't the real solution be:

[Procrasti]

> Here's a cut and paste from someone that has not heard of the 1987 Black Monday crash.

Quite the contrary. Crashes are GOOD things for some people as it provides the opportunity to get stocks at very low prices. Especially transient crashes... Similarly with bubbles. Volatility rewards those who act against it... As the market SHOULD.

The big problem is that everyone wants the stock market to only go UP... This looks good for politicians and everyone thinks that helps their retirement plan and stuff... The purpose of the market is not to always go up, but to provide information and allocate resources efficiently.

Re:Wouldn't the real solution be:

[Procrasti]

The efficient market hypothesis is how the market should operate IN THE LIMIT! The market provides INCENTIVES for people to provide TIMELY and ACCURATE **INFORMATION** to the markets.

I wasn't addressing cyber attacks, I was addressing mechanisms to deliberately slow down HFT trading and the like. HFT trading *MUST* increase liquidity. Volatility is *natural* in markets (including chaos), and rewards those who reduce it.

HFT is good actually for markets, and good for everyone, because, if you actually examine the operation of markets (as double opposing queues), you will see that it is NEVER possible to harm another trader by placing trades, because you only provide (at least) BETTER opportunities for other traders, or match other traders SOONER than they OTHERWISE would have been.

The problem with HFT is that if you use their tactics against them you go to jail. Where you should be allowed to place and cancel orders and the profits go to the MOST efficient provider of information to a market.

Re:Wouldn't the real solution be:

[Antique Geekmeister]

> I was addressing mechanisms to deliberately slow down HFT trading and the like.

This is not difficult. Force the "high speed traders" to actually make the purchases, or sales, and pay transaction fees. As it stands they actually _discard_ most of their orders and pay no transaction fees, nor do the stocks ever actually transfer to their cofferes. They're engaging in pure arbitrage, at very little sirk. The largest risk is that they won't profit enough to pay for the infrastructure required for HFT.

The HFT system does not "provide information to the market", It intercepts information before other traders can csee it. I'm afraid that the idea that it "promotes liquidity" is a self-serving fraud by the traders that can afford HFT systems.

Idetifying the REAL threat.

[geekmux]

Given the parties involved in the financial meltdown of 2008, the irony and stupidity of looking to those on the inside to help "fortify markets", fucking kills me.

Congress hasn't done much to prevent another meltdown, so perhaps we should focus on the real threat. Greed N. Corruption is still in charge of Wall Street.

Bogus analysis

[Okian Warrior]

If people actually understood the stock market from the game theoretic point of view that it is designed as, they would see that no order can be placed to the detriment of any other actor's orders, and that in fact, every order either increases the value of the market to *some* set of actors in that market or at worse has no effect at all.

This, and the resulting analysis, is completely bogus.

For an analogy, consider a town with a market in the center. Farmers come from far away to sell their wares at the market.

There is risk in farming: a farmer might decide to plant corn one year, or some other crop. If everyone plants the same crop, there will be a glut and the prices will be low, but if the farmer plants one crop and no one else does, his reward will be very high.

There is need in buying. Someone who is hungry for goods will pay more than the asking price. "Hunger" here only means a general need, and not physical hunger: a father purchasing flowers for his daughter's wedding might be willing to spend more money to outbid other people who want flowers for a lesser need.

A farmer takes risks, and sometimes those risks pay off. The buyer has needs, and sometimes is willing to pay more to satisfy them. The buyer also sometimes gets a good deal.

We've all done that - found a motivated seller (or buyer) on eBay and gotten a good deal, right?

Now suppose there are runners who can ask the farmer what his selling price is when they reach the edge of town, and the father what his buying price for the goods are. The runners are very fast and can get a sense of what the prices are before either party gets to the center market.

Here's the outcome: the runners will put themselves in the middle of the transaction *only* if the buying price is higher than the selling price. If the selling price is too high, the runners won't bother.

The end result is farmer never gets an occasional boon from his risks, and the buyer never gets a sweet deal on his purchases.

The seller is forced to take risks, but will only ever see the average return. The purchaser will always pay full price, and will never see a random good deal. The end result is that both the buyer and the seller are discouraged from entering the market.

This is completely analogous to the principle of unequal knowledge, which is why used cars have no value: A buyer cannot easily tell whether a used car is any good (it's difficult to tell whether the engine or transmission will need repair, for instance) so will only pay average price for a used car. A seller with a good car won't sell it for average price, which brings down the average, which means owners won't sell mediocre cars for the (lower) average, and the cycle continues. The end result is that used cars have almost no value.

It's the same for high-speed trading, using risk instead of knowledge. If making a product takes risk but you can't recoup any value from taking the risk - then you won't take the risk.

For both the seller and the purchaser, the market has reduced in value because of the runners.

Don't buy into the hype - it's only people making a lot of money off of "a good thing" trying to pull the wool over your eyes.

Re:Bogus analysis

[Procrasti]

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.

Re:Bogus analysis

[Anonymous Coward]

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.

Why do I not feel the tiniest bit safer?

[Snotnose]

We have bureaucracies designed to fuck us over without regard to our civil rights, turning to bureaucracies designed to fuck us over financially, to "protect us".

Color me impressed. No, color me scared, cuz I see no way this is A Good Thing (TM) for me.