Friday, 9 July 2010

We're Screwed.

Computerized stock trading leaves investors vulnerable

I was concerned enough about relying on computers to make decisions for us in trading. But my concern was lessened knowing that computers will follow the rules they're given. My problem is, I don't think deviously enough.

One of the ways traders misled investors in the past was by conducting sham trades with themselves. A trader might enter orders to buy and sell shares of a stock between two entities it controls, giving the false impression there's strong investor interest for the stock at certain prices. This is called painting the tape.
The computerized trickery is enabled by physics. Since trades move over computer networks at roughly the speed of light, the firms that are physically located nearest the market centers in New York and pay market-access fees get a leg up.

The reason? Each 186 miles a trader is physically located away from the New York trading center, about a millisecond is added to the time to execute a trade, Hunsader says, because that's the speed of light; data can't travel over fiber-optic networks faster than the speed of light.

A millisecond might not sound like much, but it's an eternity for traders who can put up bids or offers for stocks and yank them before other investors located away from New York or with slower connections to the markets can respond. "Trading has gotten to the point where the speed of light is now the major source of latency," Hunsader says.
Thanks to low-cost and automated trading, trading firms can swamp markets with a deluge of buy and sell orders in a way that gives them an advantage, Hunsader says.

If you are willing to scare yourself to death, read the whole article. And then remember that everything we use is traded on the market. Like say, oil and gas.

HT Paul Wyndale


ADHR said...

You've got to admit, this is sort of awesome, too. Think about it: traders have improved efficiency to the point where the fundamental speed limit of the universe affects whether they succeed or fail.

That said, decent regs could easily solve this, but they'd require a regulatory environment with half a clue as to the technical issues involved. As we both know, though, that just doesn't exist -- at least, until today's twentysomethings wind up in government.

Catelli said...

I was awed as well.

The fundamental issue affecting regulation is the sheer quantity of the data involved. The only thing that can keep up is another computer running another program looking for irregularities, that has access to all trading data. And it/them have to be within 1 light-second of all trading centres....

And even then a human still has to parse, interpret and analyze the results before a full legal investigation can be made. This part is still the weak link

OR... We fully computerize the justice system and allow decisions to be made based on algorithmic outcomes.

Anonymous said...

All praise Zoltar!! He who is purveyor of all that is good and just!!

Seriously though..if they are not going to have speed limits on dataflows online then let them abolish speed limits on roads, remove the age of majority, decriminilize drugs..hell decriminilize EVERYTHING! Trading has essentially sunk to the depth of 9 levels of hell depravity and the powers that be seem to be completely flumouxed about what to do about it. What are the most extreme powers at the President's disposal when the very fabric of the nation is being threatened from within with tacit support from both houses of Congress and the Supreme Court??? I am really starting believe (like deeply) that some kind of military overthrow of the U.S. government followed by a Cromwellian inspired Regency to clear out the criminals and jail/excecute them for treason and crimes against humanity (as required) followed by a thorough rethink of the World Economy based on ecological principals...even if that means slowing everything the fuck down so that us puny humans can have a moment to THINK for a change before we ACT.

The Fed and Treasury have spent their extrodinary measures.. well now Mr. President, is your chance to apply yours.

This kind of coup would obviously be unthinkably disruptive and would no doubt lead to a global rout... But war is on people's minds and let's face it, our backs are against the wall..big time. Given how powerful the U.S. military is, I fear that only a conflgaration that threatens tearing the U.S. and the rest of the World asunder can do justice to the quagmire of corruption and dowright evil that is choking the World to death (and I am not only referring to Goldman Sachs here)!

That is the elephant in the room. When governments become so corrupted as to be painfully disfunctional, individuals step in and change the course of history... and there is no shortage of examples in the 20th Century to inspire the burgeoning leaders of the 21st, however (ig)noble their intentions....

Please remain seated until the violence has come to a full stop.