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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: of 463394  
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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