Market Data Firm Spots the Tracks of Bizarre Robot Traders

[n2doc]

Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation's stock exchanges.

What they do doesn't show up in Google Finance, let alone in the pages of the Wall Street Journal. No one really knows how they operate or why. But over the past few weeks, Nanex, a data services firm has dragged some of the odder algorithm specimens into the light.

The trading bots visualized in the stock charts in this story aren't doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

In fact, it's hard to figure out exactly what they're up to or gauge their impact. Are they doing something illicit? If so, what? Or do the patterns emerge spontaneously, a kind of mechanical accident? If so, why? No matter what the answers to these questions turn out to be, we're witnessing a market phenomenon that is not easily explained. And it's really bizarre.


"When I pulled up that first chart, we saw 'the knife,' we said, that's certainly algorithmic and that is weird. We continued to refine our software, honing the algorithms we use to find this stuff," Donovan told me. Now that he knows where and how to look, he could spend all day for weeks just picking out these patterns in the market data. The examples that he posts online are just the ones that look the most interesting, but at any given moment, some kind of bot is making moves like this in the stock exchange.

"We probably get 10 stocks in any 10 minutes where we see something like this," Donovan said. "It's happening all the time."

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http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/

[xchrom]

1. Yeah - I'm not thinking it's an accident or didn't start out

That way.

And it's very scary.

[phantom power]

2. speaking as a programmer...

this might be simply a case of some algorithm guy saying "hey, I can submit lots of orders for 'free', so I'm going to try a lot of different, possibly optimistic values, just because why-not? If it doesn't work, I lose nothing."

[unblock]

4. it actually looks like the "hunting" problem of automatic transmissions

automatic transmissions have (or at least used to have) a problem when they were in 3rd gear and decided that 4th was better, but when they got into 4th gear they decided that 3rd was better, so they kept hunting for the right gear. it tended to happen if you climbed a long hill at just the wrong constant speed.

this looks similar, like they get a buy signal and buy, but as soon as they see their own trade, they get a sell signal and sell, and so on.

in other words, i think it's just a bug.

[formercia]

3. Organized Crime

They are stealing the recovery right out from under us. The bots are nothing but parasitic methods to drain revenue from the Market.

[econoclast]

5. Actually looks like a denial-of-service attack

In a classic denial of service attack , huge numbers of automated queries are sent to a server representing not legitimate inquiries but a malicious attempt to swamp the server receiving the requests. Here we see large numbers of "orders" that aren't really intents to trade. They are "outside the spread". Example. The market in a stock is trading at a bid/offer spread of say 35 - 35.5. Meaning brokers stand ready to buy at 35 or sell at 35.5. These are huge numbers if orders to buy at 10 or sell at 60. Clearly no one is actually going to hit one if those bids or offers. ( if someone hits the 10dollar bid, they have agreed to sell shares at 10 when they could have sold at 35) So there is no intent to do any actual trading. Just seems like the whole purpose is to generate orders that the system as a whole and all the participants have to deal with ... Even if it is only to discard them. It takes up time. Actually looks like someone is trying to slow the bid/offer/trade execution process down. Making it deal with an increased order flow ... But not actually doing any trading. Someone with an axe to grind against automated trading? Trying to mess up the High Frequency Trading algorithms?

[dixiegrrrrl]

6. Trying to make the market volume looked artificially high?

Does market volume count completed orders or just bids?