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Security IT

Hackers Find New Way To Cheat On Wall Street 271

Posted by timothy
from the just-downstream dept.
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."
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Hackers Find New Way To Cheat On Wall Street

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  • by omnichad (1198475) on Thursday January 06, 2011 @05:10PM (#34783618) Homepage

    Trades only take effect every 5 seconds. Wouldn't that stop this sort of abuse?

  • by HerculesMO (693085) on Thursday January 06, 2011 @05:22PM (#34783768)

    The reality of Wall Street ripping off the consumer is not far from reality. I work "in the industry" as well (and have, for 10 years), and I've seen and been witness to all kinds of shams and problems that Wall Street is culpable for.

    Let's just leave it simply, the average investor doesn't know *anything* about investing. They don't know stocks, bonds, they don't know diversification, they don't know how to change allocations before retirement age for 401ks, etc. But the sad thing is, Wall Street doesn't either. They may know the P/E ratios of firms, the current stock price, and lots of fancy math, but the reality is that a lot of money made on Wall Street isn't in active trading, it's in knowing their customers and playing on that information, and topping it all off with fees. For example, Goldman advises its customers, and the clients lose out, and Goldman wins -- See here. This isn't uncommon.

    The simplest secret about Wall Street is that the average investor can forgo using a trading firm, and just invest in an index fund instead (like the S&P). Those funds have very low fees, and require zero understanding about Wall Street. They go up as the economy gets better, they go down as it doesn't. And less than 20% of firms out there can *BEAT* the S&P, meaning that 80% actually do worse. In addition, they charge higher fees. So if you throw your money into the index fund, you don't have to know anything, and you do just as well as 80%+ of the firms out there, and keep the fees they'd charge you to just meet the same ROR in your pocket.

    Sadly, you'll never hear about this on the Street, because it would ruin their whole scam. The only thing you need to know is that 5-10 years before retirement age, pull out of indexes and put into guaranteed products so you don't get thrashed on your retirement day, and you'll be a happy camper.

    With the amount of influence Wall Street has in our government, in our economy, it's about due time we start getting them the hell out of the way so that we can do better as a country. I know it sounds cheesy, but it's true.

  • by Anonymous Coward on Thursday January 06, 2011 @05:31PM (#34783900)

    Don't confuse government regulations with other kinds of regulations. Even Wal-Mart has regulations requiring shirt and shoes. There's nothing wrong with voluntary regulations. It's only an issue when the government violently imposes them, usually in a piss-poor fashion though that's irrelevant. It's still rape even if the sex was good.

  • by jfengel (409917) on Thursday January 06, 2011 @05:45PM (#34784060) Homepage Journal

    Liquidity IS good, and in the end, I don't see how this is doing anything but provide more of it.

    If the hackers are netting themselves a bunch of money by out-trading the other high-frequency-traders... good for them. It's not my money they're taking, because I've got better places to put my money than trying to out-arbitrage the arbitrageurs. But both of them, the Evil Hackers and the White Hat Ginormous Wall Street Bank, are both making sure that when I do sell my stocks, I've always got somebody to sell it to.

    The arbitrage means that maybe I'm losing .01% off the transaction. If that's Big Money in aggregate, it's still only a tiny fraction of the mount of money on the line. It's money I couldn't ever get my hands on.

    So I don't really much care who wins here. Let 'em fight it out.

  • by 0100010001010011 (652467) on Thursday January 06, 2011 @05:50PM (#34784114)

    Why not every 30? That should be enough time for a HUMAN to decide if they want to buy or sell something. It seems that this lightning fast trading works great and they're happy if they're making money. If something cascades into failure (like it did earlier last year, or was it '09?) then they just say 'oops, do over'. Imagine you were cashing out your 401k during the 'accidental' crash last year. One second stuff is at 1000, the next it's at 300. In the time it took for electrons to travel from your broker to the market.

    The worth of a company what a stock is supposed to buy you into, doesn't change even from minute to minute.

    I mean, they wouldn't make as much, but it'd be fair to the common person. (So it'll never happen).
    OR, the other suggestion that I heard suggested would be to tax trades inversely proportional to how long they're held.
    1 minute: 90%
    1 hour: 80% .. .. .. ..
    20 years: 5%
    40 years: 1% (people that actually it as investment).

  • by khasim (1285) <> on Thursday January 06, 2011 @05:52PM (#34784136)

    Setting a fixed time moves the goal to whomever can shave their systems closest to that fixed time.

    Set a fixed time ... plus a random fragment of a second. That way no one knows exactly WHEN the trade will go through. But it's still close enough for humans choosing to trade.

    The key here is to reduce the ability of software to "cheat" but still allow humans to trade.

  • by rsilvergun (571051) on Thursday January 06, 2011 @05:58PM (#34784216)
    just ban this kind of trading already. The easy way to do it is set a minimum timeframe you're required to hold onto stock before selling.
  • by davidwr (791652) on Thursday January 06, 2011 @06:25PM (#34784584) Homepage Journal

    For investments available to the average investor OR products available to sophisticated investors which are known to "quickly and significantly" influence the value of products available to the Average Joe:

    Instead all bids should be firm for a certain period of time - say, 30 seconds, and the trade should be delayed as long as the price keeps going up and the market would stay open to allow those trades to complete.

    If the seller needs to sell by a specific time, then anyone bidding in the last 30 seconds will have the right to match the high bid, with the shares going to either the "earliest" bidder who was willing to pay the final price or divided up among all of the "winning" bidders in a predictable, well-defined way.

    In any case, the "market price" wouldn't be defined until the trade completed.

    For products available only to sophisticated investors which don't quickly and significantly affect the value of products you or I might buy, there shouldn't be any "protect the naive investor" rules, just rules to prevent outright fraud.

  • Re:I doubt it (Score:3, Interesting)

    by Anonymous Coward on Thursday January 06, 2011 @07:46PM (#34785576)

    Just to be clear here, we are talking about nanoseconds; one of which is how long it takes light to travel 30cm. So, let us posit the existence of equipment that can cope with some number of trades over a span of nanoseconds in a single day (86 trillion). This is simply a smooth line to the average person, but we have money on our side. Every variable is controlled, and all equipment has a quality that would make the SI kilogram standard look like a dirty rock I dug up yesterday. In fact, screw network links. All of this is taking place on 1 chip with such perfect connections between CPU and memory that every transaction takes, oh, a thousandth of a nanosecond. Plus or minus a few hundred-thousandths of a nanosecond.

    As plausible as all this, call me skeptical if I don't think such a thing can be perfectly symmetrical in every respect. With your time scale so small, a variety of interesting and destructive effects should arise that would normally be invisible. The quality of your copper and glass, even when controllable to parts-per-billion; The temperature of your server rooms and drives, solid-state or not; geometry of every inch of your data conduits. Although the article is discussing the attacks on the scale of internet traffic and not the minuscule realms you are, the idea is still that attacks that occur below the level of your accuracy cannot be detected. 7 years ago we could measure on the scale of the attosecond, which makes your nanoseconds look like regular seconds. Why should I, the layman with oodles of money and time to invest, believe that your system is as absolute as you say it is?

  • by JayWilmont (1035066) on Friday January 07, 2011 @12:17PM (#34793000)

    First of all, thank you for taking the time to explain your position.

    What does it mean to "make markets"? Stock markets have been around for a hundred years without high frequency trading, and they worked just fine.

    Why do we need middlemen to quickly buy and sell stocks? They only are willing to do so if they can make money. So if I put out a sell order and want to sell my stocks for at least $5, and there is a HFT firm in the market that buys my stock for $5 one hundredth of a second later, then a few seconds later my stock is sold to Bob for $5.02, then I am loosing out on 2 cents. To me, this has *negative* value. I would like to know that, barring any significant news of the company, a few hours (or even days) wouldn't really change how much my stocks sell for. With HFT, the microsecond my stock sells matters, and this is very bad for long term investors.

    (If a middleman were the only person willing to buy my stock at $5, hold on to it for a two weeks while waiting for the company's earnings report to come out, and then sell it after that report to Bob for $5.50, then I think there is value in that, because otherwise I may not have been able to sell my stock at all, making it worthless, or had to sell for much lower than the market price, making the market price worthless. But I would consider this person to be a short term investor rather than a useless middleman.

    There are plenty of ways to implement the bid matching part of a gated system to eliminate the effect of bid-submission order or order size. For example, a Uniform Price Auction could be used, where everybody submits sealed bids and all of the traders willing to pay the competitive market clearing price for the round get to trade. (See wikipedia for details).

    The goals of the stock market should be to efficiently and accurately value companies and allow all sizes of investors to fairly participate. The needs of people participating in the market as a casino (those who aren't trading based on information about the underlying company but only on trying to beat the system) should be ignored.

UNIX was not designed to stop you from doing stupid things, because that would also stop you from doing clever things. -- Doug Gwyn