Thanks Craig. Interesting.
Bruno
On 09 Oct 2012, at 14:21, Craig Weinberg wrote:
Shades of things to come. What happens when we plug the economy of
the entire world into mindless machines programmed to go to war
against numbers.
Mysterious Algorithm Was 4% of Trading Activity Last Week
http://www.cnbc.com/id/49333454
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.”
Hunsader’s sonar picked up that this was a single high-frequency
trader after seeing the program’s pattern (200 fake quotes, then
400, then 1,000) repeated over and over. Also, it was being routed
from the same place, the Nasdaq [COMP 3112.35 -23.84 (-0.76%)
].
“My guess is that the algo was testing the market, as high-frequency
frequently does,” says Jon Najarian, co-founder of TradeMonster.com.
“As soon as they add bandwidth, the HFT crowd sees how quickly they
can top out to create latency.”
(Read More: Unclear What Caused Kraft Spike: Nanex Founder)
Translation: the ultimate goal of many of these programs is to gum
up the system so it slows down the quote feed to others and allows
the computer traders (with their co-located servers at the
exchanges) to gain a money-making arbitrage opportunity.
The scariest part of this single program was that its millions of
quotes accounted for 10 percent of the bandwidth that is allowed for
trading on any given day, according to Nanex. (The size of the
bandwidth pipe is determined by a group made up of the exchanges
called the Consolidated Quote System.)
(Read More: Cuban, Cooperman: Curb High-Frequency Trading)
“This is pretty out there to see this effect this many stocks at the
same time,” said Hunsader. High frequency traders are doing anything
to “tip the odds in their favor.”
A Senate panel at the end of September sought answers on high-
frequency trading as investigators look into the best way to stop
wealth-destroying events such as the Knight Capital computer glitch
in August and the market “Flash Crash” two years ago.
(Read More: Ex-Insider Calls High-Frequency Trading ‘Cheating’)
Regulators are trying to see how they can rein in the practice,
which accounts for 70 percent of trading each day, without slowing
down progress and profits for Wall Street and the U.S. exchanges.
RELATED LINKS
Cuban, Cooperman: Curb High-Frequency Trading
Do Markets Need a 'Kill Switch'?
Ex-Insider: HFT Is 'Cheating'
Will Glitches Get Worse?
“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
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