Mysterious Algorithm Was 4% of Trading Activity Last Week

Craig Weinberg Tue, 09 Oct 2012 05:21:21 -0700

Shades of things to come. What happens when we plug the economy of the 
entire world into mindless machines programmed to go to war against numbers.

*Mysterious Algorithm Was 4% of Trading Activity Last Week*

http://www.cnbc.com/id/49333454

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 <http://www.cnbc.com/id/15837548/?cid=187385&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. Friday.

“Just goes to show you how just one person can have such an outsized impact
on the market,” said *Eric Hunsader <http://www.cnbc.com/id/49216434/>*,
head of *Nanex <http://nanex.net/>* 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* [COMP 3112.35 -23.84 (-0.76%)
]<http://data.cnbc.com/quotes/COMP>.

“My guess is that the algo was testing the market, as high-frequency
frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As
soon as they add bandwidth, the HFT crowd sees how quickly they can top out
to create latency.”

*(Read More: Unclear What Caused Kraft Spike: Nanex
Founder<http://www.cnbc.com/id/49216434/>
)*

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. (The size of the bandwidth pipe is
determined by a group made up of the exchanges called the Consolidated
Quote System.)

*(Read More: **Cuban, Cooperman: Curb High-Frequency
Trading*<http://www.cnbc.com/id/49216430/>
*)*

“This is pretty out there to see this effect this many stocks at the same
time,” said Hunsader. High frequency traders are doing anything to “tip the
odds in their favor.”

A Senate panel at the end of September sought answers on high-frequency
trading as investigators look into the best way to stop wealth-destroying
events such as the Knight Capital computer glitch in August and the market
“Flash Crash” two years ago.

*(Read More: Ex-Insider Calls High-Frequency Trading
‘Cheating’<http://www.cnbc.com/id/49103708/?Ex_Insider_Calls_High_Frequency_Trading_Cheating>
)*

Regulators are trying to see how they can rein in the practice, which
accounts for 70 percent of trading each day, without slowing down progress
and profits for Wall Street and the U.S. exchanges.

Mysterious Algorithm Was 4% of Trading Activity Last Week

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