Quick Introductory Short Story
So I enjoy playing a game called EVE Online: A Super Serious Spaceship Game. It's cool and fun but that's neither here nor there. It does, however, have an advanced in-game economy like none other and mimics the fundamentals of supply vs. demand similar to real world markets. Much like every other video game there is botting and I wanted to use the notorious EVE market bot as an example for a precursor (for the record botting is against the rules and will get you banned). I have never personally used any botting software but from what I understand and observed is the bot simply updates buy and sell orders once it realizes it's been outbid or undersold, keeping a profitable spread. With that being said some people have managed to pinpoint certain assets where multiple bots are active. They then manipulated the buy and sell orders with their own just enough that it resulted in a hilarious bid war between said bots that ultimately inflated price of said asset until one shut down.
Are Big Fund Market Algorithms Vulnerable?
I would normally assume that investment firms, hedgefunds, etc. all have the best security and IT money can buy but the hacking of Equifax sorta took that hypothesis out back and shot it. It is probably safe to assume these algorithms used for position hedging are extremely complex and secure, however, could they be influenced by external factors?
Much like the primitive EVE market bot I referenced earlier - I'm curious to how market algos would play out in a situation where they went unchecked with an active "offensive" market algo in play. This "offensive" market algo would be designed to throttle prices upward by influencing our market's algo tools into a bid war... in layman's terms. I understand the complexity and would prefer to not spend hours rabbling on how they work. One could hypothesize this would not be incredibly hard a task (for a group with relevant skills) if information was collected on said algos inner-workings... leads me to my next point.
Cyber Warfare and Recent Hacks
There has been a drove of hacking lately with many U.S. entities falling victim, even as recent as this week. Some of these victims are very involved with the stock market such as investment platform Scottrade (2015), investment banking giant JP Morgan Chase & Co. (2014), and as previously mentioned Equifax. They mainly point towards "the data breaches" however I feel it's completely plausible malicious software could have been left behind to collect information on algorithmic tools utilized by said entities. It would also be possible for said hackers to pool small funds taken from each affected individual into a large fund. The large fund would later be used in offensive algo manipulation campaign. There has been a significant amount of news on various hackings but I feel it's probable that these stories are all smoke screens for something far more sinister.
Anyway, what I'm getting at is the hypothetical possibility market algos could fall victim to external manipulating factors that would result in hyper inflated bubbles. These massive bubbles would expand from algos running wild against one another at which point the price is propped up only by the underlying botting battle.
Why Am I Pondering This?
First off I know that a large portion of trading is done by real people. With that being said we can't neglect the exponentially increasing involvement of market algo tools processing massive orders every .001 second. I mean 9:30 to 10:30 am EA is essentially an episode of robot wars every day. A constant battle back and forth of hedging .005 cent trades to direct an underlying equity down or up into it's desired PT for the day. Put and option contracts are bought and sold as powerful computers process hedging software to calculate positions that minimize exposure long term.
I'm rambling, sorry, anyway - algo vs. algo: what made me think about this besides a game about spaceships? Look at the volume. Seriously. Look at that explicit REE'ing Spoiler. The " Trump Bumpanddump " can only explain for so much before you realize "wait... there is a lot more going on there...". What the hell happened last year? Let me illustrate what I'm talking about.
NOTE I'm using Fidelity's Active Trader Pro platform w/ additional indicators specified below:
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The chart is set to daily over 10 year period.
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QTY x4 "EMA" are provide in light blue, dark blue, green and purple representing 50, 100, 200, and 365 (Modern) respectively.
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"M" is set to 90 days w/ over-bought and over-sold being 2,000 and -2,000 respectively.
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"RSI" is set to 90 days w/ high and low being 60 and 40 respectively.
Take a look at the DOW Jones Industrial chart I MS Painted on:
https://i.imgur.com/7EHCJrP.png
Is it me or is that volume surge rediculous? Trading volume quadrupled+ and look at those over-bought indications complimenting the price rise.
Now take a look at the S&P 500 chart I also MS Painted on:
https://i.imgur.com/qOQbb1L.png
Same deal as the DOW... where is all that volume surge coming from?
I'm Tired Of Typing: My 2 Cents
As stated initially I am more curious about the potential than I am pointing fingers while holding the tin-foil cone firmly atop my head. The volume surge, over bought indicators, lack of correction, and exponential rise in pricing clearly indicates what could be interpreted as market algorithms battling one another. I am entertaining the idea that one or more hedge calculating tools were corrupted and/or altered to remove restrictions. This corruption or unrestricted state could thus be influenced upward outside of buy and sell order norms by offensive market algos. It's just a thought, interested in your feedback.
TL;DR: The DOW, NASDAQ, and S&P have another -10% move down to go as stocks become overheated. I'm also entertaining one of what could be a million reasons why the market is falling.
Submitted February 10, 2018 at 05:15AM by BBTB2 http://ift.tt/2sjYro1
