Jul 14 2009

Machine vs. Machine

Published by at 11:40 am under General,Speculative

A small financial trading firm, Themis Trading LLC, has published an interesting paper on how various firms use extremely fast short term trading program to make/scam/steal profits from the various electronic exchanges and ultimately from everyone else who is dependent on efficient markets (i.e. almost everybody via mutual funds, pensions, etc.). The process involves using programs running on machines with extremely fast access to the exchanges’ machines to place transactions based on what other machines are doing (e.g. breading up and trading blocks of shares). This paper was published about six months ago and other press articles has described aspects of it. It seems that a lot of people know about this game, but it was new to me.
Recently, a former Goldman Sachs programmer was accused of stealing their program trading code which may have been used in implementing such a scheme. In that case, the U.S. Attorney said in court “..this program could use it to manipulate markets in unfair ways..”. Fair when G-S uses it, unfair when someone else does? That seems a little odd.
What intrigues me is the battle of machines involved in this game. From the descriptions, the ‘intelligence’ is programmed in by their owners and the machines just implement the strategies very, very quickly (microsecond?) before other participants can trade. It feels like ‘front running’ and old game in which a trader hears of a coming trade and buys/sells in front of it (which in turn sounds a lot like insider trading).
The machines do not represent “smart machines” which figure out strategies or tactics. Or, maybe they do……

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