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Mammoth mystery algorithm on Nasdaq: who and why?
France 24 ^ | 10/12/2012 | Sébastian SEIBT

Posted on 10/12/2012 10:31:54 PM PDT by bruinbirdman

A single algorithm which placed and then cancelled orders on the Nasdaq accounted for 4% of all quoted traffic in the US with no clear goal. An investor gives FRANCE 24 his insight into the mystery which has concerned market watchers.

A single mammoth mystery algorithm has set alarm bells ringing for market regulators and players, and underlined the market’s vulnerability to technology and the woeful lack of regulation on algorithms.

A single algorithm last week placed and cancelled orders on the Nasdaq accounting for 4% of all quoted traffic in the US. Not only this, it also accounted for a colossal 10% of the bandwidth that is allowed for trading on any given day.

It placed orders in 25-millisecond bursts, involving approximately 500 stocks, but never actually executed a single trade.

The algorithm’s stopped operating at 10.30am ET on Friday.

Market players are now scratching their heads as the point of this huge market play which did not execute a single trade.

An anonymous French investor who goes by the name of LC and writes the blog Margin Call www.margincall.fr, told FRANCE 24 in a telephone interview, “This system had numerous unusual features: the main one being the sheer number of orders placed.”

One thing is for sure: the operation was not designed to make money. Executing no actual transactions, the programme had no effect on the stocks involved. “Simply flooding the system with orders looks like a way of testing the limits of the algorithm,” LC explained.

Jon Najarian, co-founder of TradeMonster.com, agreed. “My guess is that the algo was testing the market, as high-frequency frequently does”, Najarian told CNBC.

Hungry for high-frequency trading

Another explication could be that the architect behind the operation was seeking to create an imbalance in the market. The orders generated by the algorithm used up 10% of the Nasdaq’s daily quota of bandwidth. “Hogging such a big chunk of available space inevitably slows down the system, giving a lead to trading floor operators, because everybody else receives data with a delay of a few seconds,” LC explained. “It’s a raw deal for the others, but for now, there’s no law against placing orders at such a high frequency.

“This only goes to show just how big a part IT plays in financial activity,” he went on to say. “Through the large number of transactions executed automatically – and bearing in mind that stock market operators receive a commission for each one, financial markets have become hugely dependent on high-frequency trading. It now represents 31% of the New York Stock Exchange’s revenue and 17.1% of Nasdaq’s.”

This dependence could explain why little has been done about these algorithms that can and do create significant market volatility. Profit-hungry stock markets would rather turn a blind eye to anomalies than scare away potential HGT aficionados, LC explains on his blog.

But a laissez-faire attitude to high-frequency trading remains a risky business for traditional stock markets, as demonstrated by the alarming Flash Crash two years ago. On 6 May 2010, the Dow Jones Industrial Average plunged 9.2% in the space of just ten minutes.

The crash, unprecedented in the history of Wall Street, was caused by a mass of orders placed using software. But even after an investigation by the Security Exchange Commission (SEC), no measures were taken against algorithmic trading.

However, the US regional Federal reserve bank did issue a warning on September 18th aimed at high-frequency trading firms who take shortcuts in their risk controls as they seek out faster ways to trade.


TOPICS: Business/Economy; Crime/Corruption; News/Current Events; Politics/Elections
KEYWORDS: 201005; 20100506; 20120918; 20121011; algorithm; bandwidth; crash; cyberwar; dowjones; dryrun; flashcrash; highfrequency; market; octobersurprise; stockmarket; testrun; trading; volatility

1 posted on 10/12/2012 10:31:59 PM PDT by bruinbirdman
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To: bruinbirdman

The markets are vulnerable to cyber attack via hijack of trading computer networks.


2 posted on 10/12/2012 10:47:07 PM PDT by montag813
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To: bruinbirdman

So no one is concerned about cyber-terrorism?


3 posted on 10/12/2012 10:47:25 PM PDT by BuckeyeTexan
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To: bruinbirdman
http://www.freerepublic.com/focus/f-news/2944019/posts

Could this have anything to do with Panetta’s warning?

4 posted on 10/12/2012 10:51:00 PM PDT by Just mythoughts (Please help Todd Akin defeat Claire and the GOP-e send money!!!!!)
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To: bruinbirdman
it also accounted for a colossal 10% of the bandwidth that is allowed for trading

And if it was a stress test that phrase gave them pretty much all they need to know to clog the bandwidth completely.

5 posted on 10/12/2012 10:52:39 PM PDT by Domandred (Fdisk, format, and reinstall the entire .gov system.)
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To: Domandred
"And if it was a stress test that phrase gave them pretty much all they need to know to clog the bandwidth completely. "

Perhaps, NASDAQ was running the test?

yitbos

6 posted on 10/12/2012 10:55:26 PM PDT by bruinbirdman ("Those who control language control minds." -- Ayn Rand)
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To: bruinbirdman

What person not only HAS enough clout to cause a problem, but also is wicked enough to actually DO IT? Does the name George Soros ring a bell?


7 posted on 10/12/2012 11:03:18 PM PDT by Tucker39
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To: bruinbirdman

Shake down test by Russia/al Qaeda/Iran.


8 posted on 10/13/2012 12:46:59 AM PDT by muir_redwoods (Hopey changey low emission unicorns and a crap sandwich)
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To: bruinbirdman

Test run for blowing things apart if Obama gets too far behind in the polls.


9 posted on 10/13/2012 2:57:55 AM PDT by Iron Munro (SPEIL)
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To: bruinbirdman

“algorithm”
Can somebody break this down that a country person can understand?
Thanks


10 posted on 10/13/2012 3:25:16 AM PDT by conservativesister
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To: conservativesister
Dark Pools by Scott Peterson

Release Date: June 12, 2012

A news-breaking account of the global stock market's subterranean battles, Dark Pools portrays the rise of the "bots"- artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who've created them.

In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy. Levine created a computerized trading hub named Island where small traders swapped stocks, and over time his invention morphed into a global electronic stock market that sent trillions in capital through a vast jungle of fiber-optic cables.

By then, the market that Levine had sought to fix had turned upside down, birthing secretive exchanges called dark pools and a new species of trading machines that could think, and that seemed, ominously, to be slipping the control of their human masters.

Dark Pools is the fascinating story of how global markets have been hijacked by trading robots--many so self-directed that humans can't predict what they'll do next.
11 posted on 10/13/2012 3:42:48 AM PDT by sjm_888
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To: Iron Munro
Test run for blowing things apart if Obama gets too far behind in the polls.

Or, if Romney actually wins - scrambling finances on a huge scale would definitely make a bump in that road - same king of spite as taking the "Ws' off keyboards when Bush won.

12 posted on 10/13/2012 5:16:16 AM PDT by trebb ("If a man will not work, he should not eat" From 2 Thes 3)
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To: conservativesister

An algorithm is a set of decision rules.

If the price of XYZ stock reaches $x, then buy.
If the price of ABC stock reaches $z, then sell.

although it appears that what might have happened is that the program put in a bid of $(x-1), then when the price got close, cancelled the order. Similarly the program might have actually placed an ask of $(z+1), and when the price got close, cancelled the offer.


13 posted on 10/13/2012 6:28:20 AM PDT by scrabblehack
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To: bruinbirdman

Why is this allowed? Shouldn’t there be some delay mechanism (buffer) to prevent these “anomalies” from creating big swings in the market?


14 posted on 10/13/2012 7:30:44 AM PDT by Hotlanta Mike (Resurrect the House Committee on Un-American Activities (HUAC)...before there is no America!)
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To: bruinbirdman

Markets are rigged.

How can one compete against computers making traded by the millisecond


15 posted on 10/13/2012 8:10:50 AM PDT by Para-Ord.45
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To: Para-Ord.45

The markets have been rigged since the dawn of markets.

You beat them by watching the volume and know that buying must always lead to selling, and vice versa.


16 posted on 10/13/2012 8:31:15 AM PDT by Free Vulcan (Election 2012 - America stands or falls. No more excuses. Get involved.)
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