How one algorithm accounted for 4% of trading in one day on Wall Street

This is a problem of which I was totally unaware - and probably many of you are in the dark about it as well.

CNBC:

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. ET 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.

[...]

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.

If some event occurs that would roil the markets and one of these programs was running at the time, the system could freeze up due to a lack of bandwidth according to this article:

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 if a sell-off occurred and one entity was hogging this much of the system.

Greedy, clever trader or something more insidious like a foreign government testing a program to see if it could create havoc in an emergency? When it comes to Wall Street, regulators are usually a couple of years behind the crooks. Let's hope they figure out how to deal with this before it becomes a serious problem.



This is a problem of which I was totally unaware - and probably many of you are in the dark about it as well.

CNBC:

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. ET 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.

[...]

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.

If some event occurs that would roil the markets and one of these programs was running at the time, the system could freeze up due to a lack of bandwidth according to this article:

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 if a sell-off occurred and one entity was hogging this much of the system.

Greedy, clever trader or something more insidious like a foreign government testing a program to see if it could create havoc in an emergency? When it comes to Wall Street, regulators are usually a couple of years behind the crooks. Let's hope they figure out how to deal with this before it becomes a serious problem.



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