Theft of trading ideas has long been a proud tradition on trading floors across the world. There was a time when smart traders would hang out in the same restaurants, bars, and flophouses as their institutional counterparts trying to catch a hint about tomorrow's dealings or to manipulate another trader with some skullduggery--and then try to take advantage of the trade. These days it's common knowledge that computers do a lot of our financial dealing, but a somewhat frightening article in the London Review of Books describes how the algorithms have now taken up the trader's practice of trying to fool each other.
Most trading algorithms execute simple tasks. Say a large institution wants to purchase a large chunk of stock in a company: the program will seek out shares and buy them in many, many small quantities so as not to send the price soaring with a massive order--and to stop other traders from seeing what they're up to and getting in on the deal. Called VWAPs, they're fairly benign.
But Donald MacKenzie, a professor of sociology at Edinburgh University, tells us that algorithms are now stalking the VWAPs, trying to surreptitiously figure out their intentions so they can get out in front of big trades, buying shares ahead of VWAPs and then selling them back to it at a gain.
But there are craftier and decidedly less ethical programs out there seeking to manipulate the market outright. Called "spoofers," they might buy a big chunk of shares of a certain ticker. Then the program issues a bunch of buy orders that are fractionally below that price--an indicator to anyone watching the buy order volume that the stock is in demand. This would spur other algorithms (or human traders) to purchase the stock on the prospect that demand will push up the price. The spoofer then dumps its shares and quickly cancels its buy orders when the price rises on the buying pressure it created. Sneaky.
Basically, the algorithms are now trying to outfox other algorithms. That's particularly troublesome given that computer programs are basically running financial markets these days. We all saw what happens when the algorithms get irrational during last year's flash crash, when the entire U.S. market shed 6 percent of its value in five minutes due to algorithmic share dumping. While these programs are inherently stabilizing, it's a bit frightening to think of what might happen if some super-algorithm really got the better of his computational counterparts.
Humans use these tricks on a daily basis with Pink sheet stocks...This is nothing new if they automated it.
Actually, this is one of the least sneaky ways to rig the game. Credit default swaps - now that's a hi-tech scam!
A few of us apply Inpathique Research's discovery of predicting where the trading computers will take a stock's price based upon their influence of the past. I never make a trade without applying the Inpathique techniques which allow me to know the high and low prices to expect from all that computerized trading.
Unfortunately, they stopped selling their manual years ago because too many people were starting to use the knowledge which meant we were trying to fight each other and all losing. Fortunately, with time, it has recovered very nicely, thank you very much. Nobody has figured out how to create a program to do the work, but I find now days (due to experience) that most of the time I can just look at a stock's chart and figure out the Inpathique patterns without drawing them out.
You could use Volume Spread Analysis to know what the machines (and traders for that matter) are doing in advance. Some software resources and examples are listed here: http://pipbuilders.posterous.com
That's all redundant...
Why is the word Skynet suddenly bouncing around in my head?
Computers running the world's financial markets?
Advanced AIs designed to fight each other and trick humans?
@juuu I agree, credit default swaps created and packaged by the 'most trustworthy' financial institutions, then when the bill comes, those same banksters get FAT checks, their companies are all bailed out (because they're the most trustworthy) and the whole thing is glossed over as 'one big mistake'.
Whoops! Sorry about your life savings! Where did the money go? What's that? All of the people at the companies that caused these problems got MILLIONS in bonuses? Oh, look we found the money!