Algorithms that are fighting with each other on stock market

[Liberty]

http://www.lrb.co.uk/2011/05/19/donald-mackenzie/how-to-make-money-in-microseconds

 

 

found via:  http://io9.com/5800577/the-stock-market-depends-on-how-algorithms-are-interacting-with-each-other

 

Far more controversial are algorithms that effectively prey on other algorithms. Some algorithms, for example, can detect the electronic signature of a big VWAP, a process called ‘algo-sniffing'. This can earn its owner substantial sums: if the VWAP is programmed to buy a particular corporation's shares, the algo-sniffing program will buy those shares faster than the VWAP, then sell them to it at a profit. Algo-sniffing often makes users of VWAPs and other execution algorithms furious: they condemn it as unfair, and there is a growing business in adding ‘anti-gaming' features to execution algorithms to make it harder to detect and exploit them . . .

 

Whatever view one takes on its ethics, algo-sniffing is indisputably legal. More dubious in that respect is a set of strategies that seek deliberately to fool other algorithms. An example is ‘layering' or ‘spoofing'. A spoofer might, for instance, buy a block of shares and then issue a large number of buy orders for the same shares at prices just fractions below the current market price. Other algorithms and human traders would then see far more orders to buy the shares in question than orders to sell them, and be likely to conclude that their price was going to rise. They might then buy the shares themselves, causing the price to rise. When it did so, the spoofer would cancel its buy orders and sell the shares it held at a profit. It's very hard to determine just how much of this kind of thing goes on, but it certainly happens. In October 2008, for example, the London Stock Exchange imposed a £35,000 penalty on a firm (its name has not been disclosed) for spoofing.

[beerbaron]

50 Years ago a writer named Adam Smith wrote a book called 'The Money Game', it's the same thing all over again.

 

BeerBaron

[biaggio]

-hopefully this will provide us with irrational market/prices.

 

-crazy that you have computers buying just because other computers are buying.

 

-then when we have a flash crash, we reimburse them for losses, how is that fair.

[EdWatchesBoxing]

Wow, VWAP scalping. It actually makes a lot of sense. Algo trading is interesting, but it adds no real value to society/finance.