This is interesting, and stirs some pleasingly cyberpunkish ideas around in my brain. Three months ago, from The Atlantic:
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.
This week, from various sources including Futures Magazine:
“Two Norwegian traders, Svend Egil Larsen and Peder Veiby, were handed suspended prison sentences on charges related to market manipulation. According to the Financial Times, the two were charged for figuring out how a computerized trading system at a large American firm that is a subsidy of Interactive Brokers would react to certain stock moves and using that information to manipulate the price of low-volume stocks.”
From the The New York Times:
“But Mr. Brosveet says the court would never have ruled the way it did “if it was just a stupid human being” on the other side of the trade. Instead, it was a computer, and “the computer must be held as a responsible actor,” he said.”
The examples of the patterns mentioned in the Atlantic article are fascinating, and are almost certainly exactly doing procedurally what these clever Norwegians were doing (apparently) manually. Except thousands of times a second, looking for a response that’s not clear; I wonder how many of the stock market’s algorithm designers even have threat models, much less models that account for subtly malicious input. I suspect all of them will, by this time next week!