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Spoofers Tricked High-Speed Traders by Hitting Keys Fast

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Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#51

Post by chatmasta »

We are going to see more cases like this, as market-making robots increase their trade volumes. Big players are pouring more and more money into automated trading, and that trading relies on algorithms. Often the algorithms involve some sort of machine learning, and therefore depend on the input data, which is vulnerable to manipulation.

For example, imagine a bot programmed by some 5-10 person team at a hedge fund. They find that running sentiment analysis on twitter and news comments can accurately predict whether a given security will rise or fall in response to a fed press release. The profits are good, so the team manager moves a couple million into the algorithm. One night after work, a team member tells his programmer friend about the algorithm, and mentions some of the most profitable stocks. This friend goes home and programs another bot to corrupt the sentiment analysis dataset, by posting fake comments with properly tuned sentiment. The hedge fund bot reacts as expected, and now the friend has the power to manipulate the bot. He has outsmarted the bot and can take advantage of the high volume trading.

That might be a bit of a contrived example, but corruption in machine learning data is a very real problem. People are just starting to study it. [0]

[0] https://www.usenix.org/system/files/conference/usenixsecurit...

[1] http://dl.acm.org/citation.cfm?id=1128824

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#52

Post by kasey_junk »

im3w1l wrote: post #50

Let's say you trained a bot with reinforcement learning, rewarding profitable trades. And it, by itself, learned this strategy. Would it be illegal? Sure, the reason the strategy works maybe price manipulation, but it is hard to ascribe intent to it all the same.

That is precisely why this case is so good for the SEC, there is an email chain.

If you had an email chain stating that you were going to train your bot to layer, that would show intent, which would make it illegal. Otherwise it isn't.

Intentionality is at the heart of the law.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#53

Post by kasey_junk »

billpg wrote: post #33

HFT systems were tricked into making bad decisions? Boo hoo hoo! Won't anyone please think of the HFT systems?

I don't think anyone is suggesting that it is wrong to "trick" HFT systems (for instance HFT systems make most of their money "tricking" other HFT systems).

What is wrong is doing something expressly illegal to do it. Oh and then putting it into an email chain with an FBI informant.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#54

Post by kasey_junk »

joosters wrote: post #5
BogdanCalin wrote: post #4

Earlier quoted context omitted.

That's exactly what I was thinking. When high frequency traders are doing it it's OK but when this guy tricks them into actually taking some risks it's fraud.

I think the only evidence for fraud here are the recordings of the people discussing their aims of manipulating the markets. If those didn't exist then it does sound like the trades alone could never be considered market manipulation. If that is the case, am I breaking the law if I just buy some shares and, during the phone call with my dealer, make a comment that I hope my share purchase drives the price up?

No. Hoping that your trade moves the market one way or the other is completely different than placing orders you hope never trade.

Why is it different? Because the law says it is.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#55

Post by sjtrny »

gd1 wrote: post #46
fenollp wrote: post #43

Earlier quoted context omitted.

I'm suggesting retraction should not be implemented in the first place

That's bizarre. So let's say AAPL is trading at $120, and you put in a limit order to buy it at $110, then you should never be allowed to cancel it? How long does the order sit there for? What if AAPL's price goes up to $400 over the next few months, do you have to leave your limit order there forever?

I don't think fenollop means not withdraw it at all. He means after someone has said "I'll take that offer". At which point you can't withdraw it. So these people will make a loss of enough people take up their offers. This risk is mentioned in the article. It doesn't explain why "spoofing" is illegal though. It should be legal. They are trying to shift the market (so is everyone) through an action that exposes themselves to massive loses.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#56

Post by kasey_junk »

BogdanCalin wrote: post #36
throwaway183839 wrote: post #28

Earlier quoted context omitted.

When most high frequency traders trade, they are not actively trying to manipulate the market for their own gain (in the cases where they are manipulating the market, they should of course be punished). Most high frequency traders are trying to make money by providing liquidity, i.e. offering to buy and sell at a better price than the rest of the market. This benefits both the HFT (because they make money) and other…

95 percent of high-frequency trader orders are cancelled (so fast that nobody can take them). Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. I don't buy the "providing liquidity" defense of HFT. http://blogs.wsj.com/moneybeat/2014/04/03/schwab-on-hft-grow...

> 95 percent of high-frequency trader orders are cancelled

And how does that compare to the pit trader order cancel rates HFT replaced?

> Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days

Are these same traders potentially working on an IPO deal? How about being acquired.

Lets put it this way, it is trivially easy to come up with a strategy that is profitable (also just FYI they mean the buy/sell made money, they dont count their operations cost in that) on 99% of days. Its that 1% that wipes out your whole company that is hard to avoid.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#57

Post by kasey_junk »

reacweb wrote: post #41

These people have just found a way to abuse the stupidity of HFT. IMHO, they have played along the rules and the SEC should ban HFT.

>IMHO, they have played along the rules

Your humble opinion is factually incorrect. At the heart of this story it doesn't have anything to do with tricking HFT (how ever much that may appeal to you). They broke a basic law, one that everyone who trades knows, and then they put it in an email chain to an FBI informant.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#58

Post by kasey_junk »

mhomde wrote: post #44

The only reason why this is "illegal" and HFT is legal is that the HFT firms are paying customers of the exchange. It's really quite scary how complicit and front-runned the whole stocktrading business has become. I really recommend Flash Boys which is an interesting read on the topic http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-ebook/dp...

Layering was illegal before there was HFT.

Also, everyone who has any expertise in the way markets and especially electronic markets work, thinks that "Flash Boys" is a terrible book on the topic. You literally are worse off in understanding for reading it.

Try "Dark Pools". Still sensational and occasionally wrong, but at least it gets close.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#59

Post by kasey_junk »

sjtrny wrote: post #55
gd1 wrote: post #46

Earlier quoted context omitted.

That's bizarre. So let's say AAPL is trading at $120, and you put in a limit order to buy it at $110, then you should never be allowed to cancel it? How long does the order sit there for? What if AAPL's price goes up to $400 over the next few months, do you have to leave your limit order there forever?

I don't think fenollop means not withdraw it at all. He means after someone has said "I'll take that offer". At which point you can't withdraw it. So these people will make a loss of enough people take up their offers. This risk is mentioned in the article. It doesn't explain why "spoofing" is illegal though. It should be legal. They are trying to shift the market (so is everyone) through an action that exposes thems…

This system currently does not allow you to withdraw an offer once it has been matched. That is not what happened here.

The reason "spoofing" is illegal is because it gives a huge information advantage to one party that the other parties do not have. Similarly to insider trading. I have no opinion on whether those should be illegal, but if the basic premise of the market changes from "we assume everyone here wants to trade" to "this information is garbage", it will definitely have a negative impact on the price of the traded instruments.

Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast

#60

Post by mhomde »

kasey_junk wrote: post #58
mhomde wrote: post #44

The only reason why this is "illegal" and HFT is legal is that the HFT firms are paying customers of the exchange. It's really quite scary how complicit and front-runned the whole stocktrading business has become. I really recommend Flash Boys which is an interesting read on the topic http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-ebook/dp...

Layering was illegal before there was HFT. Also, everyone who has any expertise in the way markets and especially electronic markets work, thinks that "Flash Boys" is a terrible book on the topic. You literally are worse off in understanding for reading it. Try "Dark Pools". Still sensational and occasionally wrong, but at least it gets close.

I can agree that Lewis was perhaps more focused on weaving a compelling story than focusing on the finer details of HFT. Nevertheless its a good primer on the subject and an interesting read. Thanks for the tip about Dark pools
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