Documenting the Coming Singularity

Friday, May 13, 2011

Battling Financial Market Algorithms

PopSci - May 13, 2011 by Clay Dillow

Trading Places More computers than people. Rafael Matsunaga via Wikimedia

Theft of trading ideas has long been a proud tradition on trading floors across the world. There was a time when smart traders would hang out in the same restaurants, bars, and flophouses as their institutional counterparts trying to catch a hint about tomorrow’s dealings or to manipulate another trader with some skullduggery--and then try to take advantage of the trade. These days it’s common knowledge that computers do a lot of our financial dealing, but a somewhat frightening article in the London Review of Books describes how the algorithms have now taken up the trader’s practice of trying to fool each other.

Most trading algorithms execute simple tasks. Say a large institution wants to purchase a large chunk of stock in a company: the program will seek out shares and buy them in many, many small quantities so as not to send the price soaring with a massive order--and to stop other traders from seeing what they’re up to and getting in on the deal. Called VWAPs, they’re fairly benign.

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