Plenty of academics support the HFTs' arguments. “The gap between reality and rhetoric is bigger for this industry than for any other I have seen,” says Remco Lenterman, the chairman of the European Principal Traders Association and the managing director of IMC, an electronic marketmaking firm. Many are frustrated by what they perceive as an unfair onslaught. But as regulators, politicians and the media focus ever more closely on their activities, the traders have formed groups on both sides of the Atlantic to represent their interests. Proprietary algorithms provide a competitive edge, so secrecy is engrained in the culture. HFTs do not have clients but operate with their own capital. Until recently they saw little need to engage with the wider world. Such questions have gradually drawn the high-frequency traders out into the open. How, the critics ask, can anyone assess the fundamentals of a company in a fraction of a second? How can lumbering institutional investors, let alone the little guy, hope to compete with the HFTs? And what is to stop a new set of algorithms from unleashing havoc? But the fact that they happen at all feeds the perception that today's equity markets have turned into something more akin to science fiction than a device for the efficient allocation of capital. Usually such loops are spotted and stopped, sometimes manually and sometimes automatically, without many people noticing. For a simplified example, take two algorithms that are both programmed always to outbid the best offer in the market, so they will go on outbidding each other. Often they result from algorithms interacting with each other and forming an infinite loop.
Fast and the furious software#
But there are miniature versions of such flash crashes happening all the time, says John Bates, the chief technology officer of Progress Software, a software firm. Although it was not directly triggered by high-frequency traders, the official reports suggested they helped fuel the uncontrolled selling.
The “flash crash” of May 6th 2010, when American equity markets nosedived by almost 10% in the course of a few nerve-shredding minutes, grabbed popular attention. This incident was unusual for ending in a fine, but in other respects it was not that uncommon. To complete the catalogue of errors, the firm then allegedly breached another CME rule when an employee used a colleague's trading ID to put on positions that would offset its unwanted exposures.
The other measure was meant to prevent Infinium from selling or buying more than a certain number of contracts, but because of an error in the way the rogue algorithm had been written, this, too, failed to spot a problem. One was supposed to turn the system off if a maximum order size was breached, but because the machine was placing lots of small orders rather than a single big one the shut-down was not triggered. When the algorithm started its frenetic buying spree, the measures designed to shut it down automatically did not work. The firm's normal testing processes take six to eight weeks. The NYMEX panel found that Infinium had finished writing the algorithm only the day before it introduced it to the market, and had tested it for only a couple of hours in a simulated trading environment to see how it would perform. Those alleged failures pull back the curtain on some of the safeguards that are meant to protect traders, exchanges and markets from erratic ultra-fast algorithms.
0 kommentar(er)
