Hackers Find New Way To Cheat On Wall Street 271
GMGruman writes "The high-speed trading exchanges that conduct the business of buying and selling stocks and mutual funds are so fast that hackers can introduce delays of a few microseconds completely unnoticed by today's network monitoring technology — and manipulate prices in the process to reap millions of dollars to the detriment of everyone else, InfoWorld's Bill Snyder reports. This kind of activity creates new reason to distrust Wall Street and shows how the computer networks we all rely on for conducting business and moving information are ripe for undetectable hacking."
I doubt it (Score:5, Informative)
I work in this business, and trust me - we count nanoseconds. We would notice if "hackers" were introducing delays.
Marketing from a start-up (Score:4, Informative)
There are several products on the market that are employed by the Exchanges and their large customers to track all of this.
This is a marketing paper for what appears to be an interesting product.
Existing vendors already capture, log, analyze (in realtime), traffic across multiple probes and provide real-time alerting along with monitoring, measurement, etc. These products are all leading edge and are changing rapidly. They've solved many problems with proprietary schemes of various sorts. Not the least of which was time synchronization at the nanosecond level.
For very simple public information, just look at latencystats.com. Keep in mind, more detailed info and analysis is going on behind the scenes.
Re:While the article is BS.... (Score:5, Informative)
When everyone buys index funds, the index managers have huge leverage to manipulate. The high freq traders have more leverage to manipulate the fund traders. The market as a whole becomes more correlated. There's nothing wrong with index investing, but if everyone does a lot of index investing, at some point you are looking into a pricing hall of mirrors instead of a working market and it takes fewer and smaller non-conforming players get enough leverage to tilt the whole applecart. We already see the effects of this from the studies that show that the markets are now more correlated than before the popularity of the index funds.
If you want to limit the effects of rogue players, don't just ignore them. Prohibit their abuses. The 5-second trade granularity mentioned above seems like a good start.
Re:I doubt it (Score:5, Informative)
You're an idiot and you don't know what market making is. The prices options trade at are so close to the theoretical fair price that there is very little money to be made on each trade - often only cents. To keep the company in the black while paying a bunch of talented developers and network engineers, you have to make as many trades as possible. The reason for cutting down latency is so that we can snap up that 80c before anyone else.
Maybe you're not thinking about market making - maybe you're thinking about those clowns trying to game each others' algos on NASDAQ. The guys who place orders and delete them faster than they could ever trade just to see how the other guys' algos react, and have "geniuses" talking crap about how foolproof their theory of predicting stock prices falling is, and basically treat trading as a black art. They serve no useful purpose, and just create extra noise in the data feeds that need to be processed. I don't think they really do a great deal of harm most of the time - most of the money they make and lose is just being passed around between each other. They're all a big circle jerk.
You can't lump all HF traders together. (And for the record, I'm a geek: I design, develop and support the systems; I don't sit on the dest trading.)
Re:I doubt it (Score:5, Informative)
Yeah, and then they lose it again, because they're clowns - look at the current state of Timber Hill.
Keeps the price fairer - if market makers weren't all clamouring for your trade, it might cost you $5 beyond the fair price instead of the $1 you pay because we're all trying to undercut each other. It's competition in action.
Re:Move to quantified data (Score:4, Informative)
Use your Roth account to trade with no capital gains taxes whatsoever - and you do have to hold it for amount of time.
Re:Move to quantified data (Score:5, Informative)
I work in HFT. I make markets. Obviously, there is an incentive for me to talk about all the good things HFT brings to the world. However, I also believe that we serve a function in the market. Perhaps not vital, but still a service nonetheless.
What do market makers add to the market? They're willing to stand on the other side of your trade. They serve a vital function to the market and we can trace them back to the specialist days on the floor. Let's all agree to start from there.
What do HFTs add to the market? Now this is where you have a large divide in opinion, and rightly so. Some HFT firms will engage in predatory behavior that is unfortunate, including quote stuffing and price manipulation. I am not writing to absolve all the bad things that many HFT firms do. However, in my view, ideally, HFT market makers add these factors: immediacy and continuity.
As an investor, you can go up to a trading terminal at any time in the day and someone (most likely an HFT firm) will be there to take the other side. That is immediacy. You also have access to price discovery that is happening every fraction of a second. That is continuity. These are ideal situations, and not every HFT adds these values. Firms that only remove liquidity are often not providing immediacy. Firms that manipulate prices are usually not providing continuity.
If you think, "HFT's will run at the sign of chaos!" I agree with you. The better, smarter, and faster firms will continue to stay in the market, but only up to a certain point. Why should anyone stand in the way when a big institution sells 75,000 ES contracts? We trade and provide liquidity so long as it's profitable. If you have a problem with that, you have a problem with capitalism. How do you possibly incentivize participants to absorb tail-end risk?
If you think, "But investors don't care about 30 microseconds!" I agree with you. The short reaction times are there so that we can manage risk. It indirectly adds value to the investor because it allows us to manage risk better, which allows us to provide really tight markets. Think about it. We're standing there for anyone in the world to trade against all the time. Adverse selection is the name of the game. Back in the specialist days, spreads were sometimes in dollars. Now they are in pennies, and in many liquid stocks, exactly a penny. I assure you -- if we ever move to a system that taxes each trade or throttles latencies, you will see spreads widen out immensely because it's harder to manage risk. If you impose a limit on the minimum life of a quote, you will see spreads widen because there's risk in standing in the middle of the highway for too long.
If you think, "But company values don't change every 30 microseconds!" I agree with you again. It's the possibility that they could change that necessitates high reaction speeds. Company valuations are stable -- on average. But once in a while, some information is leaked that damages the company's reputation or some big institution decides to buy a ton, and you're left with a huge position that's going against you. Should we stand there and absorb that flow even when it's not profitable?
The last point is probably the biggest factor in a gating system where trades only take effect every N seconds. You can only update your position every N seconds, so as a market maker, you're essentially putting out a lot more risk. Some firms will be smart about risk management and be able to provide tighter spreads and make money for themselves. Some firms will not and they will go out of business.