Pentagon Turns To High-Speed Traders To Fortify Markets Against Cyberattack (wsj.com) 78
Slashdot reader Templer421 quotes the Wall Street Journal's report [non-paywalled version here] on DARPA's "Financial Markets Vulnerabilities Project":
Dozens of high-speed traders and others from Wall Street are helping the Pentagon study how hackers could unleash chaos in the U.S. financial system. The Department of Defense's research arm over the past year and a half has consulted executives at high-frequency trading firms and quantitative hedge funds, and people from exchanges and other financial companies, participants in the discussions said. Officials described the effort as an early-stage pilot project aimed at identifying market vulnerabilities... Participants described meetings as informal sessions in which attendees brainstorm about how hackers might try to bring down U.S. markets, then rank the ideas by feasibility.
Among the potential scenarios: Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash... "We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets," said Wade Shen, who researched artificial intelligence at the Massachusetts Institute of Technology before joining Darpa as a program manager in 2014.
Among the potential scenarios: Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash... "We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets," said Wade Shen, who researched artificial intelligence at the Massachusetts Institute of Technology before joining Darpa as a program manager in 2014.
Wouldn't the real solution be: (Score:4, Interesting)
Dedicated backend links with DoS mitigation, elimination of high frequency trading, moving instead to an x second or x minute tick with all incoming orders either randomly assigned service order, or organized by buy/sell price, to help mitigate timing based attacks?
The current system seems built for cheating/gaming the system, so rather than trying to solve a social/legal problem with a technical solution, how about solving the underlying cause and scale back trade timing to human accessable values?
Re:Wouldn't the real solution be: (Score:5, Insightful)
If people actually understood the stock market from the game theoretic point of view that it is designed as, they would see that no order can be placed to the detriment of any other actor's orders, and that in fact, every order either increases the value of the market to *some* set of actors in that market or at worse has no effect at all.
There is no such thing as a market order that can unfairly affect anyone else's position in the market (with the exceptions of insider trading and front running, both of them are rightly illegal).
The "fixes" people propose to the market actually tend to make it worse. For example the, "best execution" laws have made the system worse, as they have attempted to implement the physically impossible by force of law, where simple arbitrage already provided the mechanisms and market incentives to do this. (As a result of this "fix", something like front running becomes possible for the select few).
Slowing down the market like you suggest is another unnecessary and actually harmful solution to a system that is specifically designed and intended to provide instantly up to date prices that reflect all known information about a stock, in the limit (the efficient market hypothesis).
Actually allowing the stock market to operate as it is intended, with all the price volatility that involves, is actually the best available option. Those who correctly act against that volatility will profit.
One more example, there is a law that states an order cannot be placed that you do not intend to fill. A couple of uni students saw patterns and vulnerabilities in HFT bots, that reacted to large orders that were taken down after the uni student's own bots ate up the orders the HFT bots placed in response to them. The market moved wealth from the inefficient HFT bots into the hands of the more efficient uni students just as it is designed to do. However, this upset the HFT bot owners (Goldman Sachs and co)... so the uni students were arrested, charged and imprisoned, instead of being rewarded with the millions they rightfully earned. The IRONY of all this is that the HFT bots place and cancel many thousands of orders per second... but they are owned by ultra rich people and this is not a free market, but crony capitalism.
The correct answer to this, although highly unlikely, is for people like you to learn how these things are meant to operate and understand them before you suggest ideas that actually cause harm instead of solve problems... I guarantee you that a "solution" like this will result in even more money for the likes of GS and co at the cost of everyone else.
TLDR; Learn microeconomics.
Bogus analysis (Score:3)
If people actually understood the stock market from the game theoretic point of view that it is designed as, they would see that no order can be placed to the detriment of any other actor's orders, and that in fact, every order either increases the value of the market to *some* set of actors in that market or at worse has no effect at all.
This, and the resulting analysis, is completely bogus.
For an analogy, consider a town with a market in the center. Farmers come from far away to sell their wares at the market.
There is risk in farming: a farmer might decide to plant corn one year, or some other crop. If everyone plants the same crop, there will be a glut and the prices will be low, but if the farmer plants one crop and no one else does, his reward will be very high.
There is need in buying. Someone who is hungry for goods will pay more than
Re:Bogus analysis (Score:4, Insightful)
No, you are simply wrong.
What you describe is only possible with "front running" where an actor can intercept orders before they are placed on the queue and made publicly available.
If everyone only has access to orders after they are on the queue, and publicly available, then the (let's use) HFT operators can only either improve the buyer's opportunities by placing a sell order at a lower price than the existing orders, improve the seller's opportunities by placing a buy order at a higher price than the existing orders, or have no effect at all.
You don't trade.
Re: (Score:1)
You don't actually trade!
I've built bots that trade on markets... you are ignorant of their fundamental operation as well as microeconomics.
Re: (Score:2)
No, you are simply wrong.
What you describe is only possible with "front running" where an actor can intercept orders before they are placed on the queue and made publicly available.
You don't trade.
Of course. You seem to understand how it works, but want to deny it.
Re: (Score:2, Interesting)
No, you are simply wrong.
What you describe is only possible with "front running" where an actor can intercept orders before they are placed on the queue and made publicly available.
If everyone only has access to orders after they are on the queue, and publicly available, then the (let's use) HFT operators can only either improve the buyer's opportunities by placing a sell order at a lower price than the existing orders, improve the seller's opportunities by placing a buy order at a higher price than the existing orders, or have no effect at all.
You don't trade.
You are correct in describing the Okain Warriors story as "front running" which is not how HFT trading works.
However, HFT's price discovery mechanism of placing and cancelling numerous orders to discover the range of buy and sell order prices before that knowledge reaches the other investors, and then to arbitrage that knowledge is what bothers people. It results in the HFT people having special knowledge that the actual buyers and sellers do not have, and due to their arbitrage, it result in the seller NOT
Re: (Score:2)
I disagree. I think the answer is to *allow* placing orders that you might not *want* to be filled.
Cancelling orders is normal even for manual trading. Normally the price moves against you and you have to place another order at a worse price for yourself. Sometimes you are at the front of the queue, but you can see your side dropping off, so you cancel to place a better price for you (but this happens less often).
Given that you almost always must be able to cancel your orders, and given that your orders *ma
Re: Bogus analysis (Score:1)
Every gain for traders is a loss for investors.
Re: (Score:2)
No.
This is not how it works.
If I provide a more competitive price or product than you, you will not make a sale, and you will see that as a 'loss' to your business. You don't have a right to profit, and *should* lose to the more competitive supplier.
Traders increase liquidity and decrease market spread. These are good things.
Re:Wouldn't the real solution be: (Score:5, Insightful)
> Here's a cut and paste from someone that has not heard of the 1987 Black Monday crash.
Quite the contrary. Crashes are GOOD things for some people as it provides the opportunity to get stocks at very low prices. Especially transient crashes... Similarly with bubbles. Volatility rewards those who act against it... As the market SHOULD.
The big problem is that everyone wants the stock market to only go UP... This looks good for politicians and everyone thinks that helps their retirement plan and stuff... The purpose of the market is not to always go up, but to provide information and allocate resources efficiently.
Re: (Score:1)
> Here's a cut and paste from someone that has not heard of the 1987 Black Monday crash.
Quite the contrary. Crashes are GOOD things for some people as it provides the opportunity to get stocks at very low prices. Especially transient crashes... Similarly with bubbles. Volatility rewards those who act against it... As the market SHOULD.
The big problem is that everyone wants the stock market to only go UP... This looks good for politicians and everyone thinks that helps their retirement plan and stuff... The purpose of the market is not to always go up, but to provide information and allocate resources efficiently.
The other problem is that the Black Monday crash, the 2010 crash, and other similar crashes were solely due to trading practices and had nothing to do with the direction the economy was taking, the valuation of the underlying stocks, world events or anything other than the simple fact that the exchanges screwed up, and they large excursions were largely due to algorithmic trading and HFT screwing up.
Yes, we need market corrections, and yes, the market should go down as well as up.
Volatility is absolutely n
Re: (Score:2)
> Slowing down the market like you suggest is another unnecessary and actually harmful solution to a system that is specifically designed and intended to provide instantly up to date prices that reflect all known information about a stock, in the limit (the efficient market hypothesis).
They would realize that gambling for fun, and fraud, are critical parts of the complete system. I'm afraid that the "efficient market hypothesis" is as valid in economic models as a "frictionless surface" is in physics. It
Re: (Score:3)
The efficient market hypothesis is how the market should operate IN THE LIMIT! The market provides INCENTIVES for people to provide TIMELY and ACCURATE **INFORMATION** to the markets.
I wasn't addressing cyber attacks, I was addressing mechanisms to deliberately slow down HFT trading and the like. HFT trading *MUST* increase liquidity. Volatility is *natural* in markets (including chaos), and rewards those who reduce it.
HFT is good actually for markets, and good for everyone, because, if you actually examine
Re: (Score:3)
> I was addressing mechanisms to deliberately slow down HFT trading and the like.
This is not difficult. Force the "high speed traders" to actually make the purchases, or sales, and pay transaction fees. As it stands they actually _discard_ most of their orders and pay no transaction fees, nor do the stocks ever actually transfer to their cofferes. They're engaging in pure arbitrage, at very little sirk. The largest risk is that they won't profit enough to pay for the infrastructure required for HFT.
The
Re: (Score:2)
> It intercepts information before other traders can csee it
Information is a commodity.
They do take risk (except that they *arrest* their competitors).
We should encourage HFT, but accept that people and bots might place trades they do not necessarily intend to be filled, even though they in fact might be.
Please learn how markets work.
Re: Wouldn't the real solution be: (Score:2)
You don't actually *believe* the Efficient Market Lie, do you?
Re: (Score:2)
It's true in the limit... but it can never be *exactly* true, because information can not travel faster than the speed of light.
Markets use money as information signals. This information allows markets to allocate resources that maximise social welfare surplus (utility) (aka first fundamental theorem of microeconomics). Therefore the closer to the limit, the more efficient the market, the better.
Thus we should allow trading bots of all kinds to place and cancel orders as fast as our systems allow, and the m
Re: (Score:2)
So you do believe the Efficient Market Lie. Any particular reason? It seems fairly obviously false to me and to most unindoctrinated observers - so I'm wondering what's the basis of your faith?
Re: (Score:2)
I believe that it is a very close approximation to the truth.
All the EMH says is that the price of a stock reflects all available knowledge about the value of that stock. When it doesn't, it means that people have information about the stock that is NOT currently reflected in the price, which means there is an opportunity for them to provide that information and profit. So markets provide the incentive to provide them with information, and should therefore tend towards efficiency. The further from the EMH t
Re: (Score:2)
> HFT is good actually for markets, and good for everyone, because, if you actually examine the operation of markets (as double opposing queues), you will see that it is NEVER possible to harm another trader by placing trades, because you only provide (at least) BETTER opportunities for other traders, or match other traders SOONER than they OTHERWISE would have been.
I'm afraid it's not "good for markets". The extensive arbitrage saps the profit from those who offer stock, or those who do longer term inve
Re: (Score:2)
You have to understand that exchange markets are the ultimate expression of "Free Market" (from microeconomics) trade. Nobody is forced to trade, and by definition, every time a trade occurs it is because two traders *wanted* to make that trade.
Instead of thinking that HFT takes money away from people, you can think of it as making *more* money available, at *better* prices, and more *often* than without them.
The *only* way to have a trade on an exchange is by offering a better opposing trade to *everyone*
Re: (Score:2)
The "better deal" was intercepted by the HFT, who insert themselves as middle men between the original stock owner or traders and the possible clients before either of them can possibly be aware of the market changes. They also prevent possible competitors by ordering or selling stock at such scale that ordinary traders have no shares available with which to offer competitive deals. That's not "the best deal". That is monopoly power, and it's anti-competitive at its core.
I'm afraid you've also not accounted
Re: (Score:2)
> The "better deal" was intercepted by the HFT
NO THEY DO NOT! I stopped reading here, because HFTs DO NOT FRONT RUN! They have much faster access to the market than everyone else, but they do not have access to privileged (illegal) information (orders BEFORE they hit the queue). They cannot see a trade before it is on the market, only a tiny fraction of a second after it is on the market, and this makes all the difference.
What I skimmed of your post just shows you are totally clueless on this topic and s
Re: (Score:2)
> NO THEY DO NOT! I stopped reading here, because HFTs DO NOT FRONT RUN!
I'm afraid they do. Predicting how their own early trading will boost or lower a stock price is built into HFT, and it's a major source of their profits. it's critical to managing their arbitrage, to predict precisely when to reverse their tactics an individual stock or the whole market rebounds from their leading trades. If they didn't factor in the results of their own trade, _and deliberately game the system_, it would cause even
Re: (Score:2)
Front running is placing an order BEFORE the other order hits the queue because you know the order ahead of time.
HFT bots KNOW about an order before anyone else AFTER it has hit the queue.
One is illegal, the other is efficient.
ARBITRAGE IS GOOD FOR EVERYONE!
NOW FUCK OFF WITH YOUR IGNORANCE.
For example, let's say you did all your trading based on last years prices with no knowledge of the current state of the market? Are you efficient? No!!! HFT is that in the limit.
Re: (Score:2)
> Front running is placing an order BEFORE the other order hits the queue because you know the order ahead of time.
And many, if not all HFT practicioners, do exactly this. See:
http://www.investopedia.com/ar... [investopedia.com]
Quoting the article:
“Electronic front running,” which involves a HFT firm racing ahead of a large client order on an exchange, scooping up all the shares on offer at various other exchanges (if it is a buy order) or hitting all the bids (if it is a sell order), and then turning around an
Re: (Score:1)
How many markets, particularly, those selling second-hand assets, have 'wait for the price to change' as their primary purpose? While one can't stop buyers seeking the best price, their actions (eg. HFT) create barriers to entry and thus result in a cartel of buyers who control the rules to their benefit: See your own example, where players seeking the best sell-price were punished.
As long as the market is informed and efficient: For the large players, that will ALWAYS be true but for players either smal
Re: (Score:2)
There is no such thing as a market order that can unfairly affect anyone else's position in the market (with the exceptions of insider trading and front running, both of them are rightly illegal).
Problem is, insider trading is how the market runs today. And when we want to show how to punish insiders, we send Martha Stewart to jail.
Re: (Score:2)
The current system seems built for cheating/gaming the system
The current system is built for cheating/gaming the system. Haim Bodek (ex-Trading Machines whistleblower) already established this, as a matter of fact, way back in 2013. The NYT reported it. For a non-technical breakdown of what is going on, see the vpro docu 'The Wall Street Code'. The larger trading houses can use order types to push their orders to the front of the queue in a way that's invisible to the other, smaller traders. It doesn't matter how many meters of fibre optic there is between your HFT
Re: (Score:2)
For the record, this is complete horseshit.
The idea that the market should be designed for the benefit of "small players" is exactly counter to history. Once open-outcry bidding disappeared, there was no longer anything connecting the financial markets with the real world. It's nothing more than a method for siphoning money from people who work for a living and giving it to those who do not.
Re: (Score:2)
You believe the financial markets are "free markets"?
Re: (Score:2)
That's crazy. Open-outcry trading was much more transparent. At least you could tell when something wasn't kosher. Digital trading puts everything in a black box. You don't know what's happening, or with whom. The financial markets have never been less "free and efficient" since the 19th century. Do you even remember 2008?
Like digital voting machines, digital technology has been implemented because the peop
Re: (Score:2)
The current system is built for cheating/gaming the system,
FTFY
Flaws in the algorithm (Score:1)
Crash Trigger (Score:1)
The biggest weakness is a foreign entity gaining access to the brokerage accounts of a large trader and either:
a) executing a liquidate (sell everything NOW) order where billions of dollars of assets are suddenly flooded onto the market, resulting in algorithms at other trading houses doing the same (they all move in lock step with each other)
or
b) naked shorting a big stock like Apple or Google and thus causing Lehman Brothers type of events, whereby the assets are lost.
Once that money is lost, it doesn't c
Idetifying the REAL threat. (Score:4, Insightful)
Given the parties involved in the financial meltdown of 2008, the irony and stupidity of looking to those on the inside to help "fortify markets", fucking kills me.
Congress hasn't done much to prevent another meltdown, so perhaps we should focus on the real threat. Greed N. Corruption is still in charge of Wall Street.
Why do I not feel the tiniest bit safer? (Score:3)
Color me impressed. No, color me scared, cuz I see no way this is A Good Thing (TM) for me.
Who needs an attacker? (Score:2)
House of Cards (Score:2)
Pentagon needs ... (Score:2)
The Plans. (Score:2)
The US and presumably EVERY country have people that war game unlikely scenarios just to have a plan available.
How likely is it that the US would need to invade the UK? But there IS a plan for that.
Makes sense to have plans for computer attack scenarios AND to harden against them before that scenario happens.