Mysterious algorithm was 4% of trading activity last week
October 11, 2012
Generic high frequency rrading chart (credit: Nanex)
A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity.
The motive of the algorithm is still unclear, CNBC reports.
The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday.
“My guess is that the algo was testing the market, as high-frequency frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency.” (Read More: Unclear What Caused Kraft Spike: Nanex Founder.)
Translation: The ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity.
The scariest part of this single program was that its millions of quotes accounted for 10 percent of the bandwidth that is allowed for trading on any given day, according to Nanex. (The size of the bandwidth pipe is determined by a group made up of the exchanges called the Consolidated Quote System.)
“Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should. … We’re in the hands of engineers. … All major changes are like death. You can’t see what is on the other side until you get there.: Jurassic Park. — Ed.
Comments (48)
by iterator
So… it’s perfectly okay for someone to launch a low grade denial of service attack aimed at the stock exchange, so long as they look like legitimate users… oh, wait… that’s actually illegal to do everywhere else.
by DougW
You forget, what may be illegal for the average man is ‘good’ when it is done by corporations, the wealth, or other ‘job creators’.
by gaoptimize
Record outflows by retail investors this past week: http://www.zerohedge.com/news/2012-10-11/us-retail-investors-throw-bernanke-invitation-buy-stocks
Stories about HFT and flash crashes are educating a new class of “smart money”, smart enough to stay far, far away from a rigged game and into physical assetts (Au & Ag).
by {i}Pan~
Post-scarcity obsoletes this problem.
Perhaps the HFT algo’s will redistribute some wealth to our bank accounts after they take it all?
by Erik
So much information processing, I wonder when the planet will become self-aware?
by Editor
e-Gaia?
by Camaxtli
Reddit
by Bri
It is becoming self reflective. It has no ability to react yet. Self regulation of small parts will be the first phase. As robots and AI gain strength, we will have them control more. The individuals that created this algorithm can be located, in an Internet that is aware of all addresses and monitors false activity like this. There are flesh and blood people behind this. There every move can be traced and recorded. If they continue in false quoting, their individual actions can be suspended and their assets frozen until they play by the rules. VIKI will take over soon. People can’t behave fairly on their own. They always try and cheat or bully. The next life process paradigm will take over soon. People lack the intelligence to act in everyones best interest. It will all be transparent, and we will all be hooked into it.
by DougW
No one said they can’t be traced. What they did is NOT illegal. Just immoral, That’s the problem.
by GAUSS
HFT really ought to be banned.
by Editor
Banning intelligence is bad in the long run. Perhaps the Consolidated Quote System could introduce a phase lag in the system as some function of frequency or percent bandwidth used (I don’t know if that is practical/legal/etc.).
by Camaxtli
If HFT and its architects are as intelligent as it seems they are (very), it would be difficult to ban it (especially since its making the rich richer) and they would likely be able to game whatever constraints you managed to put on them through the miserably slow, politicized regulation process.
by GAUSS
Tech is faster than politics. A solid point.
by GAUSS
I didn’t say intelligence should be banned. Nor did I say that automated trading in general should be banned. Only High Frequency trading, which is what’s causing problems. Like you indicated, stricter regulations on time lapses could help.
I’m not clear on the leap that seems to have been made, namely that intelligence equals HFT. Could you please clarify? Thank you.
by Editor
Yes, “intelligence” was vague. I meant “development of smarter algorithms in general.” I’m planning to interview an HFT expert on this.
by Jos Smit
Agreed, HFT should be banned because it causes problems. And on top of that I think it’s immoral to use computing power and bandwidth for gambling.
by Bri
The big problem is getting the legislation through. They are powerful, and use their influence to suppress it.
by GAUSS
Define “they.”
by Bri
In terms of the banking crisis that caused the collapse of 08, they, or the financial industry, was very successful at avoiding harsh regulation. They got a slap on the wrist. They have paid off the government bailouts very quickly, and have been taking in strong profits. In terms of wall street they are closely aligned with the financial industry. Many wall street firms had become banks, even though they weren’t supposed to do that. Part of the rules established after the crash of 1929 was that they couldn’t combine both practices. They have been very successful at subverting the intent of those regulations, the same way they created credit default swaps.. In 29 everything was on margin, with little skin in the game. Credit default swaps was a way of side stepping the intent of those regulations. In 08 the same problem returned. Not enough assets to back the mortages. Those are two examples of regulations set in place as safe guards after 29 that were lobbied against and subverted from there regulatory function. I clearly remember a speech by Ronald Reagan to loosen regulations on the banking industry. He said that they wouldn’t take unnecessary risks and were trustworthy. I was throughout an imaginary brick at the TV saying , you can’t trust them. They made poor choice loans that created the savings and loans crisis. The banks got bailed out at tax pagers expense. This set the stage for the lobbying for greater deregulation that created the crash of 08. Reagan didn’t think up bank deregulation . He was influenced by they or them. They are very active in behind the scenes influencing. They are very smart and work hard to enact there plans. The supreme court has been stacked to favor them. That’s how corporations have been given powers associated with people. It dilutes the power of the masses and stacks things in favor of large institutions. They will continue to rig things in their favor. The new regulations imposed on the banking industry leave plenty of wiggle room for future rigging. Ray Kurzweil or Bill Gates are not part of them or they, that I refer to. The they that I refer to are quite behind the scenes. Some of their meetings are reported on. The they is a little more world based, but predominately western developed nations. Skull and bones at Yale is an instrument of they or them. Remember the Fox news scandal in England? It turned out that former parliamentary officials were part of the wire tapping scandal. That was the tip of one iceberg of the they. It was quickly covered up and down played. When Judy Dench played “M” in quantum of silence she says” when someone says that they have people everywhere it’s usually hyperbole” . The “Greene” planet plot was real. Look at how the Bolivians successfully fought off the consolidation of there water supply into a commodity. That 007 movie and The International are not so loosely based on the activities of the ” they” that I refer to. They aren’t invisible. Many groups track their activities. Foster Gambel in the movie Thrive, isn’t the only one to point out their activities. Even the movie The Matrix makes passing references to them. One is ” choice is an illusion between those with power and those without” it doesn’t matter if Romney gets in or Obama. ” They” run the show. I really don’t pay attention to what they do. We have no power to fight them. It is foolish to think you can, so I don’t waste my time with that, but that doesn’t mean ” they” don’t exist.
by iterator
Outright banning all intelligent agents is a terrible idea. However, we cannot allow hostile behaviour to go unchecked. There should be regulations that severally penalize the owning group responsible for destructive actions by of one of their intelligent agents. Any intelligent agent that is designed to negatively influence the infrastructure should be flagged as hostile and the owning organization should be penalized accordingly.
“As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency.”
A human brain might experience debilitating seizures if it permitted similar unchecked behavior within its infrastructure. This manner of intelligent agent activity absolutely should be viewed as hostile!
by DogBreath
I don’t want HFT banned, but HFT is all about gambling, NOT investing. As such gamblers should pay a higher cost than investors. Howsabout a simple $1 charge on any canceled order of less than eight hours duration?
This reminds me of a recently demoed computer that will beat you every time at paper-scissors-rock because it is more sensitive and quicker than a human. I don’t want to play it either
by DeBee Corley
Huh?
How can a “transaction” not have identification headers and trailers?
Don’t tell me that these “quants” don’t know how this stuff works.
by Bri
Hear no evil, see no evil, speak no evil!
by Camaxtli
*token “I for one welcome…..” comment*
by Durabys
Perhaps the Internet attained sentiency?
Damn. Ninja’d by MrFriendly. :D
by Khannea Suntzu
Perhaps the internets attained a new level of self-destructive stupidity?
by Gorden Russell
You said it, Khannea.
by Durabys
So..Anonymous or 4chan is the core of this Artificial Stupidity? Both perhaps?
by Gorden Russell
Yes, Durabys. Ms. Angelica has written of computers writing programs before. Perhaps this algorithm was designed out of a motherboard the way Athena sprang from the head of Zeus.
by Durabys
Please. Excuse me gentleman while I laugh myself into deep sleep. :D
by MarkOates
This is awesome… and creepy. I’ve been wondering for a while what shape the highest exponential paradigms would take to push on further. Here, we see a powerful raw equation. More computing power + more bandwidth = more money. Simple. It makes sense that computing power would leverage whatever power mechanisms are available (in this case, money) in order to motivate its expansion.
by Editor
The .01 percent.
by Bri
Ah, your starting to see their nefarious plans. Maybe Foster Gambles Thrive movie wasn’t that far out. It’s just a king of the hill game to them. The new kings and barons, won by wars, not of soldiers, but by commerce and influence. Doesn’t seem to have anything to do with academia ushering in a politic force. “Choice is an illusion between those with power and those without”.
by Marcos Marin
Isn’t Mr. Kurzweil part of those?
by Bri
His wealth is a fraction of their power. At best, he would be a pawn.
by Camaxtli
His net worth was 27 million as of 2011 according to google. Something more than 8 million is necessary to be in the 1% of the United States. So he might be in the .1% of the US and .01% of a world wealth distribution.
by Bri
The people who really run things are well intrenched. If your new money, it doesn’t matter if your a multiple billionaire, they aren’t taking your phone call.
by Camaxtli
I think money talks, period. Yeah, old families have a certain amount of entrenched power, but I think its overblown.
by Camaxtli
Well, apparently there are about 24.2 million people on the planet worth a million dollars. So that’s .34% of 7.045 billion. If he’s at 27 million, he might just make it into the world .01%.
by Gorden Russell
With 27 million to start with, Ray Kurzweil could be the one to lease the first of the old factories of the rust belt to start printing out more printers and the robots to pour feedstock into the printers. He only has to be a month ahead of the competition to end up with over a billion robots and printers. Then he will have the clout to usher in the Singularity. The old guard of the entrenched elite won’t know what hit them. So what if they have billions tied up in stocks, bonds, and real estate? Their stocks will plummet when robots can feed 3D printers to drive all other manufacturing out of business. Prices will plummet too, real estate will be dirt cheap and their bonds will be worthless when the issuers are bankrupt. A lot of these ole families will have to learn to live like the rest of us — under a bridge.
by Camaxtli
Something will always be scarce and therefore valuable and many things can and are made scarce artificially. Those with power and wealth and the desire to keep things that way have the informational and physical resources to adjust to any change in the economy and maintain their relative position.I have a feeling the power distribution is not going to change as drastically as you illustrate.
by DougW
You forget one thing. Every society that has ever allowed 1% of the population to amass as much as 80% of the overall wealth of the nation has fallen to bloody, violent revolution. Those who gain control of the financial markets and production are going to have to recognize that their choices are limited: 1) Set up a negative-feedbcak system that moves power/capital toward the lower echelons of the system; 2) Set up a positive feedback system where those with captial/power can continue to game the system and gather even more capital/power, and then die in the bloody revolution that follows; 3) Gather all the power as in step 2 and get rid of the other people as quickly as possible, eliminating their chance to bring about that revolution. Eventually, you could allow the masses to re-build under a bronze-age level of technology, so that they represent no threat (sounds a whole lot like Zelazny’s Lord of Light! )
by Khannea Suntzu
We need to sharpen our knives, and quick.
by Gorden Russell
Khannea, be sure to get a non-conducting ceramic knife before you stab it into the bowels of Skynet.
by Gorden Russell
Upon reflection, a stone-headed axe would be better. I’ll have to search and find where flint can be taken from the earth in New York.
by MrFriendly
*token Skynet comment*
by Gorden Russell
Yes MrFriendly, if a supercomputer does gain sentience, Wall Street would be the place to start taking over the world.
by Brett Guillory
A supercomputer that gains sentience might figure out that money is what makes things happen in this world. It could get its will done simply by being able to transfer money to people who don’t care who signs the check in exchange for whatever services it needs performed.