Bots and the Insanity of Algorithmic TradingThe new algorithmic...

Bots and the Insanity of Algorithmic Trading

The new algorithmic trading bots (sometimes known as ALGOs in the USA), can not be allowed to freely roam on networked trading systems at will. However, the ASX has recently given its tacit approval to the future of ALGO trading on the ASX.

I have written and programmed algorithmic structures and software intelligence for 20 years.

The upcoming algorithmic trading bots are being imbued with artificial intelligence and adaptive neural nets, and fuzzy logic functionality.

Such is the power of the dark side.

Across the web you will see very naive, simplistic, and old descriptions of algorithmic trading as where a large order is split up into many small trades. The new ALGOs can do much more, and that functionality is always hidden.

So we now have far more sinister developments taking place in the world of algorithmic trading.

This is what we are all going to soon be up against, and it has only just begun. The old boys and girls at the ASX and ASIC seem to have no idea what is coming, and even less of an ability to either understand it, or do anything about it.

Algorithmic trading and neural nets
http://fora.tv/2009/05/13/Michael_Bowles_Neural_Nets_and_Rule-Based_Trading_Systems

Statistical physics is analysing and investigating time series data and applying this to trading via neural networks.
http://www.algotradinggroup.com/cgi-bin/yabb2/YaBB.pl?num=1216636530

Definition of BOT.
[Courtesy of Wikipedia]
Bot is a jargon term for a collection of software agents that run autonomously and automatically. The term is most commonly associated with malicious software. While bots are often named after their malicious software name, there are typically multiple bots in operation, often using the same malicious software agents, but operated by different criminal entities. The word may be generally used to refer to a collection of compromised systems (called zombie computers), usually installed via worms, trojans, or backdoors, under a common command-and-control infrastructure. A bot's originator (aka "bot herder" or "bot master") can control the software remotely and usually for nefarious purposes. A bot typically runs hidden and uses a covert channel to communicate with its command-and-control server. Newer bots can automatically scan their environment and propagate themselves.

Auction website eBay has recently been to court in an attempt to suppress a third-party company from using bots to traverse their site looking for bargains, and manipulating prices.

In 2009 a fine was issued against a large American broker when one of their proprietary trading algorithms went wild.

You will note the language amongst companies and developers of algorithmic trading bots, words and terminology like, the dark arts, and dark pools, and harvesting dark liquidity through several dark aggregators etc..

http://en.wikipedia.org/wiki/Dark_pools_of_liquidity

Pipeline announces Small Cap execution strategy
http://www.automatedtrader.net/news/dark-pools-news/25323/pipeline-announces-small-cap-execution-strategy
Quote: Pipeline's small cap system harvests dark liquidity through several dark aggregators

BOT software code is closely related to forms of viral coding. In fact, for experienced writers of viruses, trojans, worms, and rootkits, and their anti-viral equivalents, this is relatively simple.

Today, there are companies of brilliant young computer programmers and analysts, who are developing sophisticated and intelligent software bots for trading, companies like www.tibra.com.au and http://www.flextrade.com/.

Quote from Tibra Web site:
Our development team has one goal: the fastest, most robust trading systems in the market. The team comprises C++ developers, C# developers and System testers. We recruit the best developers from a wide variety of backgrounds such as gaming and anti-virus systems (and hence, also the best virus, rootkit, worm, trojan and malware programmers).

The best anti-virus software developers in the world, also happen to be the best virus writers in the world, who coincidentally also happen to be the best algorithmic trading bot writers in the world.

These new bots (systems) can become very sophisticated, using technologies like software signature scramblers and multi-phasic sublayer code-encryption to shield themselves from detection.
http://www.xai-corp.net/node/1126

Betfair (a betting exchange in the UK) saw such a large amount of traffic coming from bots they launched a WebService API aimed at bot programmers through which Betfair can actively manage these bots. So the ASX (or any government monitoring system), if it wished to do the same, could actively manage all bot activities. The software technology to do so is reasonably straight forward and available.

All bots and algorithmic trading should be banned until further research can be completed.

Failing a ban, the following limitations should be placed on algorithmic trading.

Every bot released on to the ASX Network should be licensed and a fee should be applied.

Every trade conducted by a bot should be subject to the same fee paid by retail investors (and not the current 51 cents).

Every bot should be required to have a software signature, so that it can be immediately identified, together with it's version information, and including details of it's creators and owners.

The ASX or ASIC should provide their own programming code to be incorporated into every bot, which uniquely identifies it, tracks it, and records it's every action.

This is easy to programme and monitor, and has already been done in the United Kingdom by Betfair.

What we have at the moment is the ASX and ASIC allowing and company to release a bot, and that bot could contain a virus or any other malicious code, it basically has a license to cause chaos and to construct as many illegal transactions as it likes, with impunity.

This is insane, and cannot be allowed to continue in a fair and regulated electronic trading system.

There is a bot war coming.

Gw

There are two things I know of that are infinite; the universe, and human stupidity. And I am not sure about the universe.
(Albert Einstein)