The Geometry of Finance: “Bizarre Robot Traders”

September 26, 2010

Many readers of this blog may have already come across a fascinating story in August from the Atlantic about mysterious high-frequency trading behavior. I missed it the first time around, on account of ASA perhaps, but recently found it: Market Data Firm Spots the Tracks of Bizarre Robot Traders. If the title alone didn’t make you want to read this story, I don’t know what could. Bizarre Robot Traders? I’m sold!

The story describes a tremendous number of nonsense bids – bids that are far below or above the current market price, and thus will never be filled – made at incredible speed in a regular, and quite pretty, patterns:

Are these noise trades an attempt to gain a tiny speed advantage?

Donovan thinks that the odd algorithms are just a way of introducing noise into the works. Other firms have to deal with that noise, but the originating entity can easily filter it out because they know what they did. Perhaps that gives them an advantage of some milliseconds. In the highly competitive and fast HFT world, where even one’s physical proximity to a stock exchange matters, market players could be looking for any advantage.

Or are they trial runs for a denial of service attack?

But already since the May event, Nanex’s monitoring turned up another potentially disastrous situation. On July 16 in a quiet hour before the market opened, suddenly they saw a huge spike in bandwidth. When they looked at the data, they found that 84,000 quotes for each of 300 stocks had been made in under 20 seconds.

“This all happened pre-market when volume is low, but if this kind of burst had come in at a time when we were getting hit hardest, I guarantee it would have caused delays in the [central quotation system],” Donovan said. That, in turn, could have become one of those dominoes that always seem to present themselves whenever there is a catastrophic failure of a complex system.

I certainly don’t know – do any of you? Either way, this story (“Bizarre Robot Traders!”) makes me feel like finance has finally entered into the science fiction future I was promised in my childhood.

5 Responses to “The Geometry of Finance: “Bizarre Robot Traders””

  1. yuvalmillo Says:

    Dan, thanks for this, as I also missed the story (for very similar reasons to yours, I would think). The ‘noise’ hypothesis makes sense and the notion of trading warfare is very interesting, but along with that there are two competing (or complementary) explanations. First, knowing that these trades are not going to get filled (exercised) and that they are very cheap to initiate, why not try them, in the odd chance that someone will actually trade with you. Second, which actually happens, is a version of the ‘fleeting trade’. The algorithm sends many trades at different prices and waits for reaction. If the reaction comes from a slower trader (basically, a machine that’s further away from the order-matching machine) then the initiator can quickly cancel the trade. Doing this over and over again would result in mapping the order books of other market actors. So, maybe less direct warfare and more espionage (or counter-intelligence).


  2. […] The Geometry of Finance: ?Bizarre Robot Traders? « socializing finance This entry was posted in News. Bookmark the permalink. ← Black strings are the bizarre, five-dimensional cousins of black holes […]

  3. Philip Roscoe Says:

    Dan – thanks for flagging this up. Wired magazine (UK) also took an interest in the story, I suspect consulting our man Daniel Beunza, which (and I speculate) led to a strange chain of events that led to Daniel appearing in a full page photo, entwined in coloured ropes. Sadly I can’t embed it here, but email requests will be considered. Daniel will be relieved to know that Mrs R thinks he’s a fine looking chap, as do many of the students in my sociology of finance module. Well, it’s nice for them to put a face to the name, isn’t it….

  4. danielbeunza Says:

    Dan — thank you! The story does indeed belong to a sci-fi novel. And I am delighted that this blog is finally engaging with high-frequency trading.

    HIgh-frequency trading is new for many. For me, it’s been a long and difficult road. It is now more than two years ago that we first encountered the puzzlement, sadness and frustration of the NYSE specialist and other market experts. Sadness at seeing that the false technological utopia of an asocial and frictionless electronic market was imposing itself through the SEC and the quants at Goldman. And frustration at seeing that the lives of our interviewees, dedicated to a very different, social model of the market, was dissolving away as exchanges emptied up of people.

    The irruption of the credit crisis has suddenly and dramatically delegitimized the technological nerd utopia. We are back to square one: a controversy over hybrid arrangements, hybrid of people and machines that need to be designed in a way that cost savings, controls and social cues are all part of the picture. These are very interesting times indeed.

    As for Phil and the Wired pics… glad to hear that they worn in their own weird way. Must confess that for now my fan mail is all too manageable.

  5. danielbeunza Says:

    Readers in the UK might be interested in tonight’s Newsnight show:

    Thursday 30 September 2010 at 10.30pm on BBC Two
    Presented by Kirsty Wark

    How much of a danger to the economy is high frequency trading? Ultra-
    fast trading is now thought to account for over 60 percent of trades
    on the US stock market and over a quarter of trades in the UK. The
    Treasury has commissioned an investigation into it amid concerns over
    “flash crashes”.

    And ahead of a report by US regulators into a crash on the Dow Jones
    that saw the index fall by 700 points in minutes, we’ll consider how
    significantly this kind of trading impacts the stability of financial
    markets.

    http://www.bbc.co.uk/blogs/newsnight/fromthewebteam/2010/09/thursday_30_september_2010.html


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