New robots trading stocks at the speed of the Internets
September 8, 2010, 12:20 am
Filed under: Uncategorized

I just read a Financial Times article that made me laugh – about ‘High Frequency Trading’ – where computer scripts rapidly trade stocks, making money off the fact that, at a given instant, the price of something might be infinitessimally higher in one financial market than in another. The speed of the transactions is so high that traders use servers located as close to the market they are trading in as possible, because the shorter distance that their signal has to travel through the pipes of the Interwebs buys them an advantage.

These high-frequency traders aren’t even regulated – literally anyone could write a script and start doing this. Sheesh. The Financial Times article focused on the question of whether the humans making money from these new financial robots are irresponsible and dangerous leeches or not. I think any sane person who was not themself making money from high-frequency trading would agree that they are.

The part that really made me laugh was ‘quote stuffing’. Traders will send so many orders (which they immediately cancel) to the computers running a particular market that that market slows down, so that prices fall a fraction of a second behind the prices at other markets, and the high-speed financial robots quickly fire off a burst of transactions which profit from that discrepancy.

If anyone who wasn’t a financial trader did anything remotely like this, it would be called a “denial of service attack”, which is a form of computer hacking and is blatantly illegal. People get sent to jail for decades for that kind of thing. But, you know, white-collar crime. Meh.


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