Friday, 1 June 2012

Vikings vs broker-bots

The ultimate financial war has just begun. Norsemen are taking on the algo bots.
It's getting bloody, but the bots have stupid human handlers, so the
Vikings are striking it rich. They're raping the Wall Street brokers
and pillaging their bank accounts.

IshitUnot: Financial Times
Norway’s day traders take on the algos
By Michael Stothard in Stockholm
Sophisticated algorithmic trading systems have become the bane of
an equity day trader’s life, reacting faster to news than any human
can and spotting price irregularities across thousands of stocks at once.

Nearly 40 per cent of all share orders in Europe are sent by algorithmic trading computers, up from just 20 per cent five years ago, according to the Tabb Group, a capital markets consultancy. In the US the figure is 37 per cent.

Yet despite the prevalence of these supposedly smart machines, some traders are making a tidy profit getting the better of these systems, which can make costly mistakes if they are not set up correctly or if their trading patterns can be understood.

Svend Egil Larsen, a Norwegian day trader, worked out in 2007 how the computer algorithm of Timber Hill, a unit of US-based Interactive Brokers, would respond to trades in certain illiquid stocks. The stocks would change price in a uniform way regardless of how much was bid.

He found that he could bump up the price with very small trades and then sell with much larger trades for a profit. He was not the only trader who worked out this flaw, which he called “painfully obvious”. But he still made $50,000 in a few months.
...Meanwhile Mr Larsen – and others – continue to beat algorithms. A few months ago he says that UBS failed to set a bottom limit on one of its trading algorithms and he picked up some stock at a discount. He estimates he made $14,000 in a few minutes....
“Every few weeks an algorithm is going wrong, and there is always someone making money from it,” says Kjell Jørgensen, associate professor at BI Norwegian Business School....
But this makes it all the more satisfying when they outwit one of the big financial institutions. “We feel like Robin Hood, or David beating Goliath,” says Mr Larsen.