Flash Mobs of Trading Robots Coalescing To Rule Markets 251
An anonymous reader writes "Financial markets experienced a series of computer glitches recently that brought operations to a halt. According to a researcher at the University of Miami, mobs of ultrafast robots, which trade and operate at speeds beyond human capability, may be responsible for these "flash freezes". From the article: '"Even though each trading algorithm/robot is out to gain a profit at the expense of any other, and hence act as a predator, any algorithm which is trading has a market impact and hence can become noticeable to other algorithms," said Neil Johnson, a professor of physics at the College of Arts and Sciences at the University of Miami (UM) and lead author of the new study. "So although they are all predators, some can then become the prey of other algorithms depending on the conditions. Just like animal predators can also fall prey to each other." When there's a normal combination of prey and predators, he says, everything is in balance. But once predators are introduced that are too fast, they create extreme events.'"
Re:Should be a tax on every transaction (Score:4, Informative)
No, they are taxed on their profit. They are even taxed on their potential profit. “Trading Positions” are taxed on their unrealized loss at the end of every year. So in fact they have to pay more profits.
And there has been a lot of debate on the effect of a Tobin tax the actual effect has been less then advertised. When France introduced one last they got more volatility, lower liquidity, and higher spreads. The last 2 imply that the middle men (such as HFT) were making more money per trade and “stealing” more profits from small stock traders.
Re: Should be a tax on every transaction (Score:5, Informative)
I know of no pure HFT company that was bailed out. Some banks have HFT divisions, but that's incidental to their problems and eventual bailout.
Re:Should be a tax on every transaction (Score:3, Informative)
"Why? No one has explained why anything needs to be done at all. It's all "rich people are making money therefore we need to screw it up for them"."
So your view is that people should be able to make money no matter what the cost and that making money is the single key thing that should come above all else?
How far are you willing to back that argument? At one extreme, if a military commander manages to pull of a bloody coup in the US and seizes the money of all the bankers and uses his new found power to retroactively making everything he did legal then is that okay?
Where exactly do you draw the line as to what is and isn't okay in terms of the ability to make money regardless of the side effects or do you feel there are no limits and the ability to make money is the single most important pinnacle of human achievement and attainment?
The problem with your argument is that most people would argue the line is drawn at the point where such money making schemes cause a crash and require a tax payer bailout because at that point it's no longer simply a case of free market economics and survival of the fittest, it's an artificially supported industry and free market libertarianism has already long gone out the window. Had things been left to free market economics the companies doing the current trading would've had to declare bankruptcy and would not now even exist.
HFT has a real impact on world economies and often unpredictably so. The more enlightened argument is that it's probably not smart to create such unpredictable chaotic systems and give them a direct feed into national and global economies where consequences range from some average Joe losing his job and house, all the way through to wider economic strife creating heightened conditions for things like riots and war where real actual lives are lost.
To turn the argument around, why do you think this sort of system should've been allowed in the first place? What do you consider to be the benefits?
"And why is that considered a good thing? I think we need more chatter and computer predation."
What makes you say this? Is there some evidence that this would increase market stability or something or were you just disagreeing with the GP for the classic online purpose of protecting your digital manhood by refusing to cede a single point without any consideration as to whether your disagreement has any merit, or in fact any meaning? I think you need to expand on this point and explain why you think increase chatter and predation is a good thing rather than just say you support it with no explanation.
"They can't see what you do on a market before you actually do something on the market."
That's the whole point of predictive algorithms used in the financial sector, they're designed to do exactly that - predict with a high degree of accuracy what manual traders are going to do based on nanosecond by nanosecond evaluation of the market and trends (something no human can do that fast), and then beat them to the punch.
Re:So, we've gone from ... (Score:4, Informative)
Botnets are a coordinated networks of computers under a single malicious control. However, these trading 'robots' are individual computers under malicious control. They may seem like they coordinate with one another but they operate completely independently, reacting to the market not to some master controller.
Re: Should be a tax on every transaction (Score:2, Informative)
Saly, you're wrong. They can. Say you have a bid at $10.00 and the spread is $0.01. You're on top of the order book right? Nobody can step in front unless they actually buy the ask lot, 'cause the pricing granularity is $0.01. Bzzzzzzt! Wrong. HFT shops have (among others) an exception and can bid in increments of 0$.0001 to *ahem* provide liquidity. So an algo can (and likely will, if needed) step in front of you at $10.0001. Suddenly, gaming the system just got a fraction of a cent easier.