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High-Frequency Traders Are the Ultimate Hackers, Says Mark Cuban 538

Posted by Soulskill
from the or-script-kiddies-of-the-financial-world dept.
An anonymous reader writes "Billionaire Mark Cuban talks in an interview with the Wall Street Journal about how he thinks high-frequency trading can be quite damaging to stock markets. He goes so far as to call high-frequency traders the 'ultimate hackers.' He says, 'They're running software programs that have one goal, and that's to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world's trading platforms, that is a recipe for disaster. ... How many times an hour are there failures across individual equities around the world because of software running algorithms battling each other for supremacy to make a profitable trade? We have no idea. It's not a question of if or when we have meltdowns, it's just a question of how big and where. It's straight out of War Games. And that's before we even get to the possibility of nefarious or sovereign hackers getting involved.'"
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High-Frequency Traders Are the Ultimate Hackers, Says Mark Cuban

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  • by hawks5999 (588198) on Tuesday June 26, 2012 @10:19PM (#40462069)
    This is insulting to hackers.
    • by Weezul (52464) on Tuesday June 26, 2012 @10:38PM (#40462249)

      It's commonly argued that HFT lowers transaction costs overall, presumably that's not such a simpl question, but ..

      There are definitely rich people who make a lot less money now that HFT lowers *some* transaction costs. It's therefore worth picking apart the messenger's credentials a bit.

      And the SEC, Obama, congress, etc. would actually regulate Wall St. if their lives depended upon it. Instead, they'd simply pass laws making HFT hard for smaller outfits, while granting Goldman-Sacks and Morgan-Stanly increased HFT.

      • Can you explain? (Score:5, Insightful)

        by rsilvergun (571051) on Tuesday June 26, 2012 @11:12PM (#40462557)
        Also, do we really want lower transaction costs? They might shave pennies or even dollars off a stock market trade, but if the point of the stock market is investment in a company (rather that shifting wealth around) wouldn't we want incentive to stay vested in a company?

        The trouble with HFTs is they siphon money w/o adding value. As near as I can tell they're the definition of an economic parasite. Again, I'm open to being proven otherwise, it's just I don't see what value they add. They don't hold onto the stock long enough for the real investors to use the capital they put into the market. They just seem to drive up the cost for real investors....

        As for Obama, he's got his hands full with oil and commodity speculators....
        • Re: (Score:3, Insightful)

          by Anonymous Coward

          your choice is this, high frequency traders taking a fraction of a penny out of every one of your transactions or we can go back to the way banks used to broke these deals where the cost was to the tuen of eights and quarters (of a dollar) instead of fractions.

          HFTs hurt a few people the most: people who trade on inside information (because they parse behavior as shown by your trading faster than you can fool them), and people who were dinosaurs and needed to earn an eighth on every share to stay in business

        • Re:Can you explain? (Score:5, Informative)

          by ShanghaiBill (739463) on Wednesday June 27, 2012 @11:21AM (#40467787)

          As near as I can tell they're the definition of an economic parasite.

          Of course they are parasites, but that misses the point. They are more efficient parasites! They do a better and more efficient job of market making than the system they replaced. A tapeworm that drinks an ounce of your blood every day, is better than a tapeworm that drinks two ounces.

          Again, I'm open to being proven otherwise, it's just I don't see what value they add.

          When stocks are traded, someone has to match up buyers and sellers. These are "market makers". In pre-HFT days, these were usually brokers, such as Merrill-Lynch, who were assigned by the exchanges to be market makers in certain stocks. They would buy and one price and sell at a slightly higher price. This price difference is the "spread". The HFT came along, and squeezed the market makers out by offering smaller spreads. Today the HFTs are the market makers, and Merrill-Lynch no longer even exists as an independent company.

          They just seem to drive up the cost for real investors....

          I don't see how you can possibly reach this conclusion. If they didn't offer "real investors" a better deal, why would "real investors" buy from them or sell to them? They offer better prices. The only losers are the old inefficient middlemen who got squeezed out of the market. Good riddance.

      • by TubeSteak (669689) on Tuesday June 26, 2012 @11:14PM (#40462593) Journal

        There are definitely rich people who make a lot less money now that HFT lowers *some* transaction costs. It's therefore worth picking apart the messenger's credentials a bit.

        Lowers transaction costs? Which ones!?
        Two years and two days ago I used this analogy to describe HFT [slashdot.org]

        Lets say you're at the supermarket.
        You reach out your hand to take [product] off the shelf,
        by the time you reach out to take another [product], the shelf is empty!

        A HFT saw your first signal and then swept the shelf clean,
        bought all of [product], and is offering to sell [product] to you at a markup.
        Oh, and the HFT has done the same thing at every other supermarket you would visit.

        Has the market been made more efficient?
        Or is the HFT behaving like an anti-social asshole?
        I'd say the answer to both questions is "yes,"
        but that the needs of society outweighs the needs of the market,
        which is why we have farking regulations in the first place.

        The fact that we're still talking about this years later is not a good thing.
        The only thing HFTers do is to sneak in between a mismatched sell and buy order so that they can steal pennies.

        The stock market got along fine without high frequency trading and there's absolutely no reason to hang onto it now,
          except that it profits a bunch of 1%-ers on Wall Street and their lobbyists.

  • Gotta love Mark (Score:5, Interesting)

    by Anonymous Coward on Tuesday June 26, 2012 @10:20PM (#40462075)

    Mark is currently trending because of the way that he handled ESPN analyst Skip Bayless last week, on live tv. He completely owned.

    http://www.youtube.com/watch?v=hv2jqFd2-qI [youtube.com]

    • Re:Gotta love Mark (Score:4, Insightful)

      by Anonymous Coward on Tuesday June 26, 2012 @10:43PM (#40462301)

      OTOH he trashed Facebook after the IPO, and looked pretty good until it was discovered that he was long in the stock.

      Cuban is a weird hybrid, he's a smart guy and a tinkerer but he has more than a little Donald Trump in him.

  • System is broken. (Score:4, Insightful)

    by msauve (701917) on Tuesday June 26, 2012 @10:24PM (#40462115)
    All trading should be required to be at the hand of a human. No trade should be able to be reversed (buy/sell) in under a minute (if not more).
    • by hawks5999 (588198)
      Under a minute? HFT happens in nanoseconds. Heck, some of the trades even happen in the future.
    • Re:System is broken. (Score:5, Interesting)

      by EdIII (1114411) on Tuesday June 26, 2012 @10:42PM (#40462295)

      Just as importantly, every single mortgage note should be hand transferred, recorded, and witnessed. If a mortgage holder cannot produce the note to a court, the mortgage is null and void, and a judgement entered by the court setting it in stone.

      That should go a long way to preventing some of the fraud and outright theft that Wall Street has performed.

      How many people have had their homes stolen, we may never know.

    • Re: (Score:3, Insightful)

      by xs650 (741277)
      I agree and would like to see the minimum hold time on stocks set at 30 days or a change in valuation of 10% or greater whichever occurs first. Then the stock flipping parasites could go to Las Vegas to do their gambling and the stock market would once again be only for investors.
      • by msauve (701917) on Tuesday June 26, 2012 @10:53PM (#40462389)
        I think 30 days is far too long. One should be able to react to current news, so something over a minute, but less than a day seems reasonable.
        • by 140Mandak262Jamuna (970587) on Tuesday June 26, 2012 @11:06PM (#40462499) Journal
          Something like a minimum holding period in seconds or minutes, prohibition on naked shorts (you must borrow the security to short), and a small transaction fee to fund the enforcement mechanism would go a long way to bring sanity to the markets. Even in the commodity markets, some entity should estimate production of pork bellies or frozen concentrated orange juice or whatever and create "chips" that should be borrowed and returned to back the shorts. The shorted volume should not exceed estimated production by several times as it routinely happens now.
      • by TubeSteak (669689)

        I agree and would like to see the minimum hold time on stocks set at 30 days or a change in valuation of 10% or greater whichever occurs first. Then the stock flipping parasites could go to Las Vegas to do their gambling and the stock market would once again be only for investors.

        No offense, but this is a dumb idea and would break the stock market.

        There are plenty of reasonable proposals to neuter the effects of high frequency trading without cluster bombing the entire exchange system.
        Most of the proposals are technical and not immediately obvious to someone who doesn't understand the market mechanics,
        but we're talking millisecond to microsecond solutions here, not days or hours or even seconds.

    • It's almost as if the markets are allowing this behavior to reward their favored parties, rather than to aim for fairness.

      So, easy enough: start a competing market that implements fair rules. I'm sure between the SEC and the mountains of financial regulations there is room for a startup to disrupt the market...

  • by skine (1524819) on Tuesday June 26, 2012 @10:26PM (#40462133)

    The real question here is; just how far can we stretch the definition of the word "hacker."

    Basically, he's saying that it's exactly the same thing to use a KeyGen as to write one.

  • by bunyip (17018) on Tuesday June 26, 2012 @10:27PM (#40462145)

    The HFT programs would slow down a lot if it cost them, say, one cent per share traded. That would not be a burden to average investors, or even the super wealthy, but it dampens the enthusiasm for shifting millions of shares a day to skim tiny fractions.

  • Two sides.... (Score:4, Insightful)

    by hamster_nz (656572) on Tuesday June 26, 2012 @10:42PM (#40462289)

    I chatted with some guys on an FPGA forum about this. They were convinced that HFT was good, as it increased the liquidity of the market.

    I ran the line that it's bad, as it exploits that over the short term all players in the market do not have complete information on the state of the market, and is therefore a highly sophisticated form of insider trading.

    In truth it it is just a mechanism to suck wealth away from those who actually create it (or invest in stocks of companies that create wealth), and does more harm than good.

    • by TubeSteak (669689)

      I chatted with some guys on an FPGA forum about this. They were convinced that HFT was good, as it increased the liquidity of the market.

      You can increase liquidity without siphoning billions from the market.

      Anyone who tells you otherwise is full of shit...
      Or maybe they're unaware that stock markets functioned before the invention of high frequency trading.
      I mean, JP Morgan and friends were "market makers" [wikipedia.org] back when trades were sent out ticker tapes.
      They certainly didn't need racks of servers running custom code to provide liquidity back then.

  • Transaction tax (Score:5, Interesting)

    by Arancaytar (966377) <arancaytar.ilyaran@gmail.com> on Tuesday June 26, 2012 @10:46PM (#40462325) Homepage

    Much like spam mail, HFT would cease to be an issue if a transaction came with even a tiny overhead. (And in both cases, I doubt it'll ever happen.)

  • fix it. (Score:4, Insightful)

    by deimtee (762122) on Tuesday June 26, 2012 @10:49PM (#40462353) Journal
    The easiest fix would be to stop the roll-backs when they fuck up. Let a few of them go broke instead of "oh I didn't really mean that, can I have a do-over?" and the rest might have a bit more caution.
    Or remove the ability to post a bid then remove it before it can be actioned. Make any bid stand for a minimum time before it can be withdrawn. 10 seconds would be long enough.
    On the downside, if you fix it, you don't get all the fancy new superfast internet links.
    • by Tom (822)

      What you are proposing is patching the exploitable bugs.

      That's good, and needs to be done. And it is not enough. In security, we learned a long time ago that whitelists beat blacklists. If you can enumerate acceptable actions, you are much better.

      So what needs to be done is putting down a definition of what proper deals look like and enforce that. Minimum standing times is one criterion. Obligation is another. There are certainly more if we put our minds to it.

      But the main issue is entirely different. It is

  • by davidoff404 (764733) on Tuesday June 26, 2012 @10:52PM (#40462381)
    As is so often the case, it's not high-frequency trading per se that's the problem; it's high-frequency trading done incorrectly that worries me. I've worked within the industry for almost eight years now and have heard a lot of stories about HFT gone bad.

    A highlight was probably the $150 million lost in the course of eight seconds by a proprietary algorithmic trading group at a very well known US bank. This group (which has since been spun off into an independent unit) focused almost exclusively on high-frequency statistical arbitrage. An analyst there apparently noticed an oscillatory deviation that occurred between certain futures very early in the trading day. Obviously, he was allowed to code an execution strategy to take advantage of this. They made quite a bit of money for about a month or so.

    What they seemingly didn't take into account was the effect that a new broadcast engine at Globex would do to their strategy. You can imagine their horror as they watched their trades slip almost completely out of phase, buying when they should have been selling and selling when they should have been buying. Eight seconds later, $150 million had been blown through a combination of piss-poor design and leverage.
  • by GoodNewsJimDotCom (2244874) on Tuesday June 26, 2012 @10:56PM (#40462411)
    How hard would it be to say:

    Stocks/bonds/commodoties have an undodgable tax of 0.2%? This is collected out of the trade automatically and sent to DC in real time.

    I'm not in a thinking mood whether this should be on sales or purchase. It would hurt high frequency traders because they'd be paying mad taxes, but people who invest like a sane man for long term the tax is negligable.
    • by ihavnoid (749312)

      The problem is that, they don't need to rely on the stock market to do the high-frequency trading. Options (the right to buy/sell something for a predetermined term) is a good candidate, and there are all sorts of markets that can mimic any stock or commodity, while regulation is nonexistant.

      Good luck writing the tax code for every single financial instrument.

      Actually, We in Korea have a small tax for every trade on the stock market. The HFT guys are running on the derivative market, where they merely tra

  • by Meneth (872868) on Wednesday June 27, 2012 @02:21AM (#40464009)
    Stock exchanges could institute a limit on how often one may trade. Perhaps once per second, or even once per minute. Shouldn't affect human trades. May have to be legislated.
    • by Z00L00K (682162)

      And also introduce a random delay between 5 and 15 minutes of each transaction. That would definitely make it harder to exploit the system.

  • by Karmashock (2415832) on Wednesday June 27, 2012 @06:37AM (#40465265)

    Slow trades down to the human scale.

    lets say trades have to be processed in "ticks"... and the ticks could be once a second or once a minute. But the idea is that trades are ONLY processed in the ticks. You can queue trades between ticks but the trades only happen in the ticks.

    If you have a system that a milisecond faster then anyone else it won't really matter that way. The trade won't happen until the tick processes.

    Once a second is still pretty fast. Once a minute is more reasonable. But because a tick is an arbitrary time span we can change it to be whatever you want. It can be once every ten seconds. Or once every five seconds.

    What's important here is that it's slow enough that people can follow it.

  • by Required Snark (1702878) on Wednesday June 27, 2012 @07:55AM (#40465637)
    HFT is a symptom of a corrupt economic system.

    If capitalism is functioning correctly, costs are minimized via competition. Wall Street is composed strictly of "middle men". These institutions should be squeezed for profit like every other part of the economy. Instead, they have become the gate keepers, and now skim the bulk of the profits for themselves. The entire economic order has been altered so that Wall Street (and the other global banking institutions) make money without regard to results. Heads they win, tails we loose.

    HFT is just one of the skimming methods. It starkly illustrates that the insiders have a strategic advantage and open competition is a myth. How can there be a level playing field when the privileged few who can install their HFT trading hardware right next to the NYSE machines have an intrinsic edge? Effectively, it is a casino and they are the house and everyone else is has a sucker bet. (Don't bother to respond that "anyone can make an investment that indirectly taps into this capability". You and I have to go though so many middle men that we see no meaningful profit.)

    Bain Capital is another example. They structured their deals so the Bain insiders always came out ahead. By definition hedge funds use other peoples money. They are not taking the risk, the investors are. If hedge fund insiders come out ahead of investors, it is another case of insiders stripping assets from everyone else. Note that this is a completely separate issue from the impact of Bain on the companies that they acquired.

    So suppose you go to Fidelity to invest, and they sell you one of their high end managed portfolios. It's composed of multiple funds also managed by Fidelity. Besides the fee to be in the portfolio (4% annually), each of the funds also charges a fee. The funds trade through the Fidelity brokerage, which also charges a fee. This is at least triple dipping. All the name brand investment firms are the same. If you have a 401K it is almost certain that you have been subjected to this scam.

    Beyond this, the bailout from the 2008 crash rewarded the corrupt investment bankers that caused the problem in the first place. The general public in the US saw it's net worth reduced to mid 1990's levels while the stock market has gone up to record highs. This is, in effect, a transfer of wealth from the productive part of the economy to the corrupt insiders. There is class warfare in the US, and the ultra wealthy are winning.

    There are two things to keep in mind:

    The game is rigged.

    All animals are equal, but some are more equal then others.

  • by Immerman (2627577) on Wednesday June 27, 2012 @09:06AM (#40466147)

    Forget the hacking component, high speed trading is legalized theft. Think about it, the essence of equitable trade is a wealth transfer in which both parties contribute something: I give you money, you give me a loaf of bread, and we both come out ahead. Or in the case of stock you give me partial ownership in a company.

    Granted stock trading has always had a certain element of gambling to it, but when it's humans it's still a matter of "I think this company is under-valued and want to buy in before anyone else realizes it". Basically it's a form of risk-management. High speed trading is essentially a man-in-the-middle attack - whereas normally stockholder A would sell buyer B their stock when they felt the market was overpriced, now they sell to speed trader S at a slightly lower price, and person B buys at a slightly higher price. Both A and B, the people actually looking at the market and weighing risks and benefits, have lost some of the value of their trade. Meanwhile the speed trader has profited by that value difference without contributing anything whatsoever to the transaction. They're parasites upon the market, adding costs and instability and giving nothing back - the sooner we ban them the better.

    To hear them talk you could build a mid-ocean trading center along the data-lines as just pull money out of the air, making money from nothing. Here's a hint - if it sounds too good to be true it probably is: It's not pulled out of the air, it's pulled out of the pockets of people that are actually doing the risk-management the market was created for.

  • by moeinvt (851793) on Wednesday June 27, 2012 @09:36AM (#40466507)

    One of the purposes of a "market" is to provide a mechanism for price discovery. The markets have instead morphed into a giant scam operation which has nothing to do with this.

    There is rampant insider trading. For example, check out the purchase of 'short' positions on JPM the day before the announcement of their big loss. It's blatantly obvious that someone got the info in advance. The federal government has an army of regulators as well as the FBI, and they do nothing to stop this theft.

    I've pulled all of my investment $$$ out of the markets, except the equity funds I've got in my 401K., and I'm on the verge of biting the bullet and pulling that out as well.

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