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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465046  
Subject: Mysterious Algorithm Was 4% of Trading Activity Date: 10/8/2012 8:40 PM
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Mysterious Algorithm Was 4% of Trading Activity Last Week

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.

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. Friday.

“Just goes to show you how just one person can have such an outsized impact on the market,” said Eric Hunsader, head of Nanex and the No. 1 detector of trading anomalies watching Wall Street today. “Exchanges are just not monitoring it.”

<snip>

http://www.cnbc.com/id/49333454
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Author: LorenCobb Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405613 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/9/2012 12:40 AM
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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. Friday.

The benign interpretation of this event is that one of the high-frequency traders is testing the response of the market to orders placed by his/her new equipment. They are trying to find the volume point at which their trades begin to slow down the market. Knowing this, they can then intentionally retard the market just enough to beat the competition, thus giving themselves a not-so-microscopic advantage. Presto, instant profits.

They can do it, too. This one trader accounted for 4% of all trades last week.

There are other interpretations to think about. This could be a foreign power -- say Iran -- assessing the resilience of the US market mechanisms, preparatory to a sustained attack on our financial infrastructure. Iran in particular has not been happy about our cyberattack on the centrifuges in their uranium purification plants. Those attacks (yes, plural) were all too successful. And let's not forget that our sanctions have caused them several years of financial heartburn. Not to put too fine a point on it: the mullahs would like some revenge.

Here are the last two paras from the article (the most important ones):

“I feel a tax on order stuffing is what the markets need at this point,” said David Greenberg of Greenberg Capital. “This will cut down on the number of erroneous bids and offers placed into the market at any given time and should help stabilize the trading environment.”

Hunsader warned that regulators better do something fast, speculating that this single program could have led to something very bad if big news broke or a sell-off occurred and one entity was hogging this much of the system.


For many reasons, we need to reign in the high-frequency traders soon... or all Hell will break loose.

Loren

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Author: PucksFool Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405619 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/9/2012 7:11 AM
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The SEC appears to be getting around to doing what should have been done years ago.
http://www.nytimes.com/2012/10/08/business/sec-regulators-tu...
As billions of shares course through the stock market each day, investors rely on the government to keep up with Wall Street’s rapid-fire traders.

But in an acknowledgment that the Securities and Exchange Commission has fallen behind the firms it regulates, the agency is turning to one of those high-frequency traders for help.

Tradeworx, a 45-person firm based in New Jersey, will dispatch its experts to Washington this month to tutor regulators on a sophisticated computer program that will give the S.E.C. its first real-time window into the stock market — something firms like Tradeworx have had for years. The S.E.C. program, designed by Tradeworx, is set to go into operation at the end of this year.


PF

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Author: hrse Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405629 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/9/2012 10:53 AM
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Why is it that we don't even know who did this?

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405637 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/9/2012 2:28 PM
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For many reasons, we need to reign in the high-frequency traders soon... or all Hell will break loose.

But the reining-in must be well focused.

I'd (as a guess/approximation) restrict it to large orders (large as compared to the typical retail investor) that are canceled within the same trading day (hour?), and waiving the first dozen or so such instances per customer account per day. Also it would be on orders that actually go to the exchanges - brokers in their own computers can deal with their own customers. And then be a fee per share, or percentage of the hypothetical trade amount, or something like that.

And I think the place to do this is within exchange rules, not by law. Changes in law may be necessary to *allow* such fees, but the exchanges will have to be the ones doing the detective work anyway so let them collect the fees.

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Author: SuisseBear Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405644 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/9/2012 3:53 PM
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I feel a tax on order stuffing is what the markets need at this point,” said David Greenberg of Greenberg Capital. “This will cut down on the number of erroneous bids and offers placed into the market at any given time and should help stabilize the trading environment.


A large part of Europe is inching closer to the Tobin tax:


Eleven euro zone countries agreed on Tuesday to press ahead with a disputed tax on financial transactions aimed at making traders share the cost of fixing a crisis that has rocked the single currency area.

The initiative, pushed hard by Germany and France but strongly opposed by Britain, Sweden and other proponents of free markets, gained critical mass at a European Union finance ministers' meeting in Luxembourg, when more than the required nine states agreed to use a treaty provision to launch the tax. ...


http://www.reuters.com/article/2012/10/09/us-eurozone-idUSBR...

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Author: Rimpynths Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405673 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/10/2012 10:13 AM
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LorenCobb wrote:
The benign interpretation of this event is that one of the high-frequency traders is testing the response of the market to orders placed by his/her new equipment. They are trying to find the volume point at which their trades begin to slow down the market.

I don't have any inside knowledge of the particulars of this case, but other benign interpretations include testing the latency of the quote feed itself, without any nefarious attempt to slow it down. That's unlikely though because they wouldn't need to do it that with 500 stocks over a week. Another more likely possibility is somebody was using a new market making algorithm that simply wasn't aggressive enough to result in any trades.

Note that the article doesn't mention any adverse effects of these quotes, meaning that they were well within the capacity of the quote system. In the end, probably a lot of noise and nothing more.

Knowing this, they can then intentionally retard the market just enough to beat the competition, thus giving themselves a not-so-microscopic advantage. Presto, instant profits.

To me, this sounds like...

Step 1: Retard the market
Step 2: ???
Step 3: Profit

What exactly do you think happens in Step 2? I could probably offer a few theories, but curious what you think happens.

Quote stuffing isn't a viable trading strategy because it is so easy to detect. It's very easy to determine which exchange they originated from and it's very easy for the exchange to determine which member sent them. The exchanges don't operate like the internet. You can't take over an army of zombie computers and launch an anonymous DDoS attack. It's very simple to determine which port the quotes were sent to and which member owns that port. Quotes may look anonymous on the consolidated tape, but they aren't anonymous to the exchange. How else would the exchange know how to fill the order if they didn't know who was sending it? Which brings me to this point of yours:

There are other interpretations to think about. This could be a foreign power -- say Iran -- assessing the resilience of the US market mechanisms, preparatory to a sustained attack on our financial infrastructure.

Definitely not the case here, way too easy to detect and shut down. See above explanation.

Rimpy

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Author: RaptorD2 Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405749 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/10/2012 11:58 PM
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... but the exchanges will have to be the ones doing the detective work anyway so let them collect the fees.

Ain't gonna happen. The exchanges are, as I have read several times at least, working with the traders to shorten their optic links and physical locations, to shorten the electronic delay as much as possible, for the firms who can afford to pay the fees for such "consulting."

Having the exchanges collect HFT fees would be like having the Fed leaders come from Goldman-Sachs. And goodness knows, we wouldn't want that. :)

Dan

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Author: RaptorD2 Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405750 of 465046
Subject: Re: Mysterious Algorithm Was 4% of Trading Activ Date: 10/11/2012 12:01 AM
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Why is it that we don't even know who did this?

My question too, but I suspect we already know the answer. We're out of the loop 'cause we haven't got the Big Bucks. I am confident there are several firms who know exactly who is trading what on the boards (large blocks or large number of blocks.)

Not kidding,

Dan

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