Market Data Firm Spots the Tracks of Bizarre Robot Trading 483
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."
Is there a chance (Score:5, Interesting)
Re:Here's an explanation for you: (Score:5, Interesting)
Believe it or not, I'm not sure that explains these weird robot trades at all.
Flood attempts? (Score:5, Interesting)
Obvious (Score:1, Interesting)
It's quite obvious to me. Those trades are going up to test and confuse the competitors' trading bots. That's what I would do.
If it's confusing to real people, then it's certainly confusing to a bot trading program.
Corewars with money (Score:5, Interesting)
Its corewars, but with real money instead of simulated computer memory.
http://www.corewars.org/ [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 (Score:5, Interesting)
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
A Solution to this and the eBay 'sniping' problem (Score:5, Interesting)
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.
Correct the market (Score:4, Interesting)
High frequency trading is an abuse of the system. Stop it, take the market away from gamblers and return it to investors.
Re:Secret messages (Score:2, Interesting)
Not machine intelligences. But it could be human intelligences. It makes for a nice safe open channel to send data covertly. You don't know who is sending the data. You don't know who is reading the data (anyone who can see the proposed trades is the possible recipient). You don't know how the data are encoded. Heck of a method of secure clear-channel communication. Or not.
Just proves amateurs don't know... (Score:4, Interesting)
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.
PINGO (Score:2, Interesting)
MUDs and the Stock Market (Score:5, Interesting)
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:Is there a chance (Score:4, Interesting)
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:A Solution to this and the eBay 'sniping' probl (Score:5, Interesting)
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.
Re:Is there a chance (Score:5, Interesting)
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
Re:Free Market = good; Capitalism = Usury (Score:5, Interesting)
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 [wikipedia.org]
"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:Nope, it's right on (Score:5, Interesting)
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:A Solution to this and the eBay 'sniping' probl (Score:3, Interesting)
Re:A Solution to this and the eBay 'sniping' probl (Score:2, Interesting)
Or simply seal all bids until the end, or only allow one bid... Then no one knows what anyone else has bid and you don't get into lame "over spending" bidding wars.
The problem with sniping is that people rarely have a hard maximum -- and even rarer that they stick to it. Plus, seeing other people bidding on an item spurs others to bid on it. I've seen items not sell repeatedly (relisted 5+ times, at the same price) yet get plenty of traffic; as soon as one person places a $0.99 bid, the bidding war is on. (nobody is interested until someone else is.)
Re:I mostly agree! But let's soften it a little. (Score:3, Interesting)
In my high school economics class back in the mid 90's we played a game about trading in the stock market. The brokers made diddly squat. In reality, the brokers are making the millions while the investors are making crap.
Re:I mostly agree! But let's soften it a little. (Score:5, Interesting)
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:Here's an explanation for you: (Score:3, Interesting)
I honestly tell people "you're better off in Las Vegas or even playing the lottery, because at least that's something you can understand and control yourself." (No, you can't control stocks even if you're very invested in it yourself because a lawsuit can change everything before you have a chance to sell.)
Re:I mostly agree! But let's soften it a little. (Score:4, Interesting)
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:Nope, it's right on (Score:5, Interesting)
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:I mostly agree! But let's soften it a little. (Score:5, Interesting)
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. (Score:4, Interesting)
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:The reasons are actually well known (Score:3, Interesting)
why hasn't this whole market fallen apart yet?
Perhaps because, if the total load is too great, they DDoS the machines of the market itself and trading slows to a crawl. Then there's nothing to skim.
are they encoded signals? (Score:3, Interesting)
It occurred to me when looking at the charts that the stock market quote system is the perfect way to send encoded transmissions- the sender/offering entity is almost impossible to trace back and the receiver can remain entirely anonymous since almost anyone can look at stock pricing charts. Next, the patterns can be nearly impossible to detect, especially if several sources are linked together to make one transmission system, since the system is filled with lots and lots of what amounts to 'random noise' in the millions of non-encoding quotes/trades out there.
A sender would also have a significant amount of bandwidth given the number of different ticker symbols, the frequency of quotes, the rate of change between quotes, the direction of quotes, etc.
Normally, a casual observer wouldn't even notice the signals present at all. In this case, a potentially unrelated event (the flash crash) caused more scrutiny, but, supposing this are encoding signals we're witnessing, we still don't know what they mean or to whom they were sent.
Re:It's called freedom to do business (Score:4, Interesting)
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.
Re:A Solution to this and the eBay 'sniping' probl (Score:1, Interesting)
50.01? The sniper may have had his bid set for $90, but the next highest bid was your $50. You just don't know. The fact is that you both determine the maximum amount you are willing to pay in advance, and the highest bidder wins. What you are whining about it that you don't get a chance to outbid the sniper.... guess what the sniper doesn't get that chance either. The benefit of sniping is that by bidding at the last second, you can some times bypass the bidding war that drives the price up. Yeah, that can suck for the seller.
A more fair solution would be to allow a SINGLE bid and no revisions. All the benefits of sniping (no need to be present for the end of the auction), and provides an incentive to bid a fair price which helps the seller. Essentially a sealed bid auction.
Re:A Solution to this and the eBay 'sniping' probl (Score:3, Interesting)
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.
Whenever I bid on ebay, I choose my maximum bid, then add a couple of dollars and a random amount of cents to avoid this. Eg if I would pay about $50, I put a bid for say $53.72. Most people bid whole numbers or the next minimum increment above, so by adding a small "snipe margin" you avoid being irritated. If the final price is higher than this, well the price is higher than you wanted to pay anyway so no problem.
Re:Nope, it's right on (Score:3, Interesting)
Sorry, but RTFA. These trade "offers" aren't genuine offers at all. They are extraneous noise introduced into the system. And, people are only speculating about the reasons.
Hell - it's remotely POSSIBLE that some of these algorithms run only because some geek likes looking at the video output! Looky the pictures: http://www.nanex.net/FlashCrash/CCircleDay.html [nanex.net]
Alright, so I don't really think for a moment that some autistic nerd does this just to look at the pics. Maybe the noise IS only there to make the competition's algorithms work a few nanoseconds slower. Or, maybe someone is playing with ideas to manipulate the market, and these are dry runs for practice. OR, maybe an outsider (like China) is already set up with a New Jersey or Manhattan data center, and they are already manipulating the market in ways that we haven't detected.
Whatever - it doesn't look to me like this should be permitted.
Re:A Solution to this and the eBay 'sniping' probl (Score:3, Interesting)
Example: you are bidding on a replacement part for an expensive (and no longer supported) piece of machinery which you use to earn a living.
VOHFT (Voice Over High Frequency Trading) (Score:2, Interesting)
Re:finally adjudicated? (Score:3, Interesting)
You missed the point of what he was saying. His point was private shares are not liquid as public shares are.
Re:Free Market = good; Capitalism = Usury (Score:1, Interesting)
Usury is not permissible. St. Gregory of Nyssa makes the following point: in the Lord's Prayer we pray, "Forgive us our debts, as we forgive our debtors." Yet one who lends money at interest profits off of the misfortune of this brother. He does not forgive his debtors; rather, he creates more debtors. He does not forgive as the Lord forgives, and thus cannot receive forgiveness from God. He has opted for the economy of the world rather than the economy of the Kingdom of Heaven, which is mercy. How then can he pray the Lord's prayer? How can he live a life like Christ? This is not about the letter of the law -- it is indeed about the Spirit: for St. Gregory reveals how usury not only harms the receiver of the loan, but hardens the heart of the usurer, alienating him from communion with God and his brother, from life in the Kingdom of Heaven.
Check out: http://www.sage.edu/faculty/salomd/nyssa/usury.html
Re:Intent (Score:4, Interesting)
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.
Re:Nope, it's right on (Score:2, Interesting)
High School kids don't pay huge amounts of taxes into the system studying and doing homework, but traders do.
No they don't - there's a number of companies out there who make their money from exploiting tax law loopholes to avoid tax for "high value" clients such as traders. A friend used to work for one of them. As for the drugs mentioned in the grandparent post, my experience of working in the City of London is that traders are so stressed out they can only cope through heavy drinking and drugs. These people are not typically bright being the same kind of aggressive slime that run used car lots or market stalls, and even if they are bright they have little control over the markets they trade in. This is why traders behave like lemmings, and it is possible to game the system by making biggish trades that sets the lemmings running in one direction only for you to then trade against them.
Re:Nope, it's right on (Score:3, Interesting)
Re:Nope, it's right on (Score:2, Interesting)
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
Interesting trick. It wouldn't work in Tokyo, though. At least, not at the hotel I stayed at once. You could double-tap an elevator button that had been hit, and it would de-select that floor. I've yet to find an elevator in the US that would do the same. Sad.