Rogue high-speed traderbots chaffing the market with thousands of nonsensical transactions every second

Nanex, a data-services firm, has discovered mysterious high-speed trading bots operating on the major stock exchanges, executing thousands of nonsensical transactions per second (for example, they may offer to buy a stock at a price much lower than the current quote, or to sell it at a much higher price). No one knows what these bots are trying to do: is just just a DoS attack on the exchange? Radar-chaff to prevent other bots from detecting another strategy? Bad code? Some call it "algorithmic terrorism" though Nanex is calling them "crop circles." Perhaps they're merely "quote stuffing" or "market spoofing" -- the jargon is delicious.

Here we see a "flag repeater" being executed on the BATS Exchange, the third-largest equity market after the NYSE and NASDAQ. 15,000 quote requests were made in 11 seconds in a repeating pattern. Each iteration upped the quote a penny until $9.36, and then the algorithm went down the same way, a penny at a time.

Market Data Firm Spots the Tracks of Bizarre Robot Traders (via O'Reilly Radar)

Primer on "high frequency trading" -- AKA stockbots

I write books. My latest is a YA science fiction novel called Homeland (it's the sequel to Little Brother). More books: Rapture of the Nerds (a novel, with Charlie Stross); With a Little Help (short stories); and The Great Big Beautiful Tomorrow (novella and nonfic). I speak all over the place and I tweet and tumble, too.

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The technology that links taxonomy and Star Trek

sergeirichard

If machine consciousness is going to arise spontaneously (as of course it will), the stock markets seem like an obvious place: Complex, self-referential and full of rich, steaming shi^H^H^Hnegative entropy.

Perhaps it also explains where all our money actually went. What after all would a market entity feed off except pure, unadulterated profit?
Crashproof

Makes me think of Charlie Stross and Economics 2.0.

Except that this bot behavior was probably written by a weird/clever human trying to exploit something, not emergent behavior beyond human understanding.
Anonymous

How did society and the market manage to function for the last couple of hundred years without the ability to propose and cancel trades each millisecond?

How could this new activity (rapid trading, or looking for transient arbitrages) add value to society?

ln the future, will all trading be carried out this way, or does rapid trading represent parasitic and opportunistic behaviour?

When the traders are human, there is an obvious cost to proposing trades – if computers can do the trading, we’ve just lost some important damping on an important system.

There needs to be an exponentially increasing cost of proposing and then cancelling null transactions, so that it’s not financially viable to run these bots.
Sxe

Spoofing the market is essentially a DDoS used by the larger-cap firms to obfuscate the real stuff going on as visible by smaller-cap firms and lone traders.

A lot of this noise is also from black-boxes, computers co-located nearby the actual market (to reduce latency) trading on a market algorithm written earlier. Since it costs nothing to send and cancel an order, you can do it a whole bunch of times.

The arbitrage strategy, of scooping up the inefficiencies, doesn’t pay so well– the algo can be programmed in a few minutes and run at minimal bandwidth (or scaled to run on many, many stocks/indices/instruments at a time) and it seems like every program trader runs one in the background for the hell of it.

Even more interesting is that traders can post invisible bids and offers as well as visible ones. The result is that pretty much everything you see on the bid and ask columns is false. You would have to watch the high-speed scrolling time and sales ticker to determine the actual, invisible bids and offers.

I don’t think the order spam is going away. It takes so little bandwidth to send a single order that even thousands of computers sending thousands of orders per minute don’t make a huge difference. The traders/firms pay for their fibre optic lines to parse the order spam faster than anyone else, and feed it equally to slow others down. Unless you’re tapping into this data via regular internet– which is suicide for anyone taking on real micromomentum risk– you’re on a closed system that doesn’t choke up bandwidth for everyone else.

I don’t think the order spam is a problem for the market as a whole. The noise can be cut out of the analytical equation.

@Anon #36: Recipe for boredom?!? No thanks!
Anonymous

The absolute 99.36% most likely thing is that the person who wrote this algorithm was trying to be “best bid” or “best offer” – i.e., the highest price in the market. However, they forgot to code in a check to see whether the current “best bid” was THEIR OWN price, and so they kept increasing their price by one penny to improve themselves.

I know this because I’ve made the same mistake myself on trading algos :-)
Anonymous

I don’t understand how these bots are anonymous. If they are making offers, and someone were to accept an offer, isn’t there identifying information in the transaction that makes the parties identifiable?
jackdavinci

I don’t understand why this is a big mystery, can’t someone just ask whoever the bots are signed on as?

And I would think this sort of thing would not be cost efficient – doesn’t each trade cost some amount of money?
JeffF

I wonder if they might be attempting to chart the response times of these networks to find quirks they can take advantage of somehow, or simply to tune other algorithms to current real world performance?

Could also be some kind of QA procedures on the high frequency trading operations. Unit tests?
insatiableatheist

The interweb has become sentient.
It took over the chatrooms a while back in its bid to learn to speak. Now it is amassing knowledge and wealth and soon you will pay your rent and tax to it.
DamienDamien

A fishing expedition for outlandish kill or fills given the changing prices and quantities. Possible. If you get a hit you know someone somewhere is desperate to buy or sell. If its at a stupid price they probably know something everyone else doesn’t.

Throwing in noise to throw of other peoples algos? Unlikely.This noise isn’t noisy enough.

My money is on in house algo nerds showing of to each other. Drawing a picture of a knife? Its the fin tech equivalent of chip developers drawing pictures that can only be seen by a microscope. Not a corporate shop though, probably a Greenwhich CT office park. This sort of nonsense happens all the time. Look at the guys who bid up oil just to get bragging rights for buying it at $100.

@18 central counterparties mean you have no idea who you’ve traded with but there is no risk, in return for a small fee CCP guarantees settlement to all market participants. Thing are further confused by netting, batch settlement,RTGS etc. Every market is different.

@19 very possible, I’de like to see when these patterns appeared. You get all kinds of weird quotes in fx markets in the early hours and overnight. Not so sure with equities though,
Anonymous

It could be a way of communicating with other traders to implement a strategy. It would be harder to prove such a conspiracy than if the computers were communicating directly. It could also maintain a degree of mutual anonymity: new algorithmic traders could work out the patterns and join the conspiracy without knowing who they were conspiring with.
Anonymous

“they may offer to buy a stock at a price much lower than the current quote, or to sell it at a much higher price” : below market bids and above market offers don t create transactions, so those would be take-profit orders left in order to take advantage of rapid swings in price and in themselves, market stabilizers (destabilizing stop-losses would be different from waht you describe). There have always been these kind of orders waiting to be excecuted and a rough balance would indeed determine the range-bound trading observed in the article. Anyway, range trading days were really boring days, I would have loved a bot doing my job on those days
Anonymous

Tell me again how this helps build up the economy?

This has all of the earmarks of a parasitic infection chewing away at the flesh of the production structure that is used to keep us all alive in a modern, industrialized society.

These “traders” are like rats in a grain bin. They consume only the germ of the seed and piss on the rest, spoiling its usefulness for any purpose.

(expletive deleted)
- Ugly Canuck
  
  Anon #28: I’m still awaiting any proof that speculation on commodities,in the long run, actually increases the amounts of commodities produced, or results in any reduction in the prices of the said commodities to their ultimate users…in other words, any evidence at all that speculation actually helps the economy.
  There simply does not seem to be any such evidence: speculation is a pox on the real economy, and should be taxed accordingly.
illmethinks

Sounds to me like someone is trying to keep the stock stable. There are so many automated systems (trading) out there now that you would have to send chasers to all ranges to keep it (stock) stable.
Ugly Canuck

Perhaps they should limit how quickly one may cancel an Order.
CC

Those are stable lifeforms emerging. Tiny ones, yes, but self-replicating. The AI will bloom into consciousness much earlier and faster than we previously calculated, professor, you fool. I tried to warn you. I tried…
- CC
  
  You, sir, are the fool. I ask you to feed this data into any modern synthesiser. Beautiful, retro sawtooth chip music instruments. It is a symphony, sir. A symphony!
Anonymous

If I had to hazard a guess, I’d say they’re soliciting responses from *other* automated systems to exploit errors in buy / sell heuristics.

If you can make a stupid offer at no cost in terms of time and effort, it doesn’t matter that it will be rejected out of hand most of the time – the few times it *isn’t* rejected could net you a decent result.

There are parallels with services that scan eBay for misspelling / incorrectly categorised goods. If you find an entry in this position, you stand a better chance of getting it for a song.

This sort of mining for errors in algorithms rather than simple metadata seems feasible.

Or someone just likes the pretty shapes it results in.
growf

In the late 90s, I worked in a City bank for a few months as a coder. When I arrived, there’d just been a clampdown on auto-trading bots like these. Traders were using them to hide their bathroom breaks from traders elsewhere. If their desk was to “go quiet”, other traders could and would take advantage of this fact.
- shadowfirebird
  
  The cynic in me says you’ve just supplied the answer.
Anonymous

We need a sane trading market.

All trades resolved simultaneously at Noon.
All buys and sells due in by 11am.

Any significant news between 10am and noon and a specific stock does not trade that day.

Any overall market news or special event between 10am and noon and a market segment or the full market does not trade that day.

A lot of peoples lives would be a whole lot better.
pKp

I can just see it : in ten years, there will be no more traders, only financial-maths wizards micro-optimizing their algorithms, and the market will be ruled by the machines. Obviously, it will be unstable, and the consequences on the “real” economy will be dire, but as we have recently seen, no one seems to have the political will to really regulate the financial markets.

We are going to live really interesting times.
Anonymous

They’re calling this ‘quote stuffing’ and High Frequency Trading (HFT) over at http://www.zerohedge.com. Supposedly up to %60 of the (record low) trading volumes of late are done by these algos. As for what is illegal about it – it’s illegal to make a quote or a bid that you don’t intend to fill. The bids are only up for MICROseconds then cancelled. Essentially what these programs are doing is probing the market, hoping to lure a carbon-based chump into making a mistake. Humans have no chance against this, and it’s thought to be one of the primary causes of the low recent volume as well as the “Flash Crash” back in May. The exchanges get fractions of a penny kickback for this, as well as very high colo fees for the servers (which must be located onsite to minimize network latency) so not only do they tolerate it, but encourage it. The regulatory agencies, such as they are, justify this as ‘providing liquidity’. Of course this liquidity can vaporize in microseconds as well. So we get more volatility, more flash crashes, less investor confidence in the market.
Rethfernhim

These could be meaningful trading strategies. An “offer to buy a stock at a price much lower than the current quote” is not nonsense: if another autobot is willing to sell at an artificially low price, why not transact?

Moreover, these could be independent threads of a more complex strategy. Think “smokey and the bandit” where one set of strategies sets a stage, and another makes the money.

Just suggesting this may not be nonsense…
Nadreck

Trading at a much lower price than the current price causes everybody’s automated stop-loss orders to go off and put in sell orders at that price. Then you just scoop up the cheap shares, put in a little buy-long order to push the “current:” price back up and sell off the cheap shares you just bought..

Nice way to scoop up a few million in five minutes.
nemik

@Rethfernhim #4

Of course it’s not nonsense. It takes quite a bit of money and resources to pull off stuff like this, you don’t do it for shits and giggles. The real point is that manipulating the market in such a way is illegal.
- turn_self_off
  
  Thinking “pump and dump”?
  
  https://secure.wikimedia.org/wikipedia/en/wiki/Pump_and_dump
  
  I am unsure how that applies when the pumping is done in this way…
- djfatsostupid
  
  I’m really interested in exactly how this is illegal because it seems like offering to buy things for less than they are worth isn’t something that can be illegal in itself, so the specific wording of the law would be very important and the burden of proof that this is part of a nefarious scheme (if it even is) would be very difficult to overcome.
  
  Do you know the specific law that would regulate behaviour like this?
  - nemik
    
    http://blogs.wsj.com/marketbeat/2010/09/13/high-frequency-trader-fined-quote-stuffing-crackdown-afoot/
    
    Sorry, I don’t know the specific law.
  - mdh
    
    I don’t, but I feel like we ought to write one.
Nadreck

An interesting possibility mentioned in the comments to the original article is that these waveforms constitute a subliminal channel of communication within bot-nets. For example, if the waveform turns sawtooth it means “everybody sell in 15 minutes”.
Barry Wilson

Makes me think of something out of one of William Gibson’s books.
bjacques

@pKp42:

And that’s before factoring in vandals, spammers and script kiddies doing it for the LULZ.
Anonymous

Everybody should read zerohedge.com
(watch out for the comment section though, it’s full of nuts)

They covered this a month and a half ago.

http://www.zerohedge.com/article/its-not-market-its-hft-crop-circle-crime-scene-further-evidence-quote-stuffing-manipulation-

It’s called quote stuffing, used by high frequency trading algorithms to manipulate prices to make money.
It’s also illegal:

http://www.zerohedge.com/article/first-hft-casualty-finra-fines-trillium-1-million-quote-stuffing-and-general-market-manipula

“No one knows what these bots are trying to do”
What a load of crap.
(sorry… still love you boingboing)
selftrack

makes you wonder if there isn’t some kind of equivalent algorithmic noise embedded in tv, radio, music or the wider media panorama to some purposeful end?
- CC
  
  Some say there is: http://www.youtube.com/watch?v=KofN-r1mohc
Anonymous

If it seems like this isn’t a problem, or if you believe that one should be able to offer bids at any price on a stock, consider this…

These bids are not legitimate bids, they are placed WELL outside the best bid/ask spread and are canceled within milliseconds.
Thousands of bids are sent and canceled in order to overwhelm the servers and give the appearance of buying/selling pressure where there is none. It’s market manipulation pure and simple.

Ugly Canuck is exactly correct. If they simply require someone to stick with an offer for 1 second (or even 1/10th of a second for that matter) then this will be stopped, or at least dramatically reduced.

Trillium Brokerage Services was fined for something very similar.
See a good write up and explanation at:
http://seekingalpha.com/article/225204-trillium-wasn-t-quote-stuffing
Anonymous

I still believe they are just testing for discontinuities in the price-demand curve for each stock.
darwindmg

#32: Actually, if you read to the end of ZERO HISTORY then you you’ll see exactly what this is all about. Let’s just say this reeks of Blue Ant’s involvement…
Umbriel

That’s precisely the explanation that’s been offered on a number of financial sites — These are truly the stock market equivalent of Spamming. By constantly attempting trades at prices “unrealistically” above or below market, the trader bot ensures that it’s first in line if the market moves unexpectedly in a way that suddenly makes those prices attractive.
Anonymous

Um duh. If I told you you were allowed to offer to buy Microsoft stock stock for $1 and you did so, hoping that someone would be silly enough to sell it to you for $1, should that be a crime?
Anonymous

More evidence that the average American should maybe just stuff all of his/her money under a mattress instead of investing in the market. :P