Mysterious Bots run amok on Wall Street

Have we reached a point when it's prudent to ask, just how much control over our lives we should be giving to artificial intelligences. Is it possible to say that we've already passed the point where machine intelligence is in the drivers seat? According to an article in the Atlantic magazine, a software engineer for the market trading data firm Nanex, Jeffrey Donavon, may have found evidence of the ghost in the machine, or he may have found evidence of a troubling trend in "algorithmic terrorism" used by institutions or individuals unknown. The unknown trading bots, are simply trading programs based on mathematical algorithms, little bits of artificial intelligence, which in most instances is programed to look for patterns in the market and make lightning quick trades to take advantage of those patterns, the goal of course being to make money. In this case, the mysterious bots identified by Donavon don't seem to be attempting to make trades, but to simply create confusing data, or noise, in the computerized trading systems.

These odd bots don't really make sense within the normal parameters of the high-frequency trading business. High-frequency traders do employ algorithms to look for patterns in the market and exploit them, but their goal is making winning trades, not simply sending quotes into the financial ether.

...,The trading bots visualized in the stock charts in this story aren't doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

In fact, it's hard to figure out exactly what they're up to or gauge their impact. Are they doing something illicit? If so, what? Or do the patterns emerge spontaneously, a kind of mechanical accident? If so, why? No matter what the answers to these questions turn out to be, we're witnessing a market phenomenon that is not easily explained. And it's really bizarre.

Nanex found the odd patterns while looking for evidence of what caused the flash crash on May 6th of this year, where the market dropped over a thousand points in just a few minutes. On July 16th, another potentially dangerous situation was set up by one of these mysterious bot driven trade orders, where in orders placed before the market opened, 84,000 trades on 300 stocks were made in just 20 seconds.

This all happened pre-market when volume is low, but if this kind of burst had come in at a time when we were getting hit hardest, I guarantee it would have caused delays in the [central quotation system]," Donovan said. That, in turn, could have become one of those dominoes that always seem to present themselves whenever there is a catastrophic failure of a complex system.

...,"Algorithms that might be spoofing the market are something that should be made illegal," said John Bates, a former Cambridge professor and the CTO of Progress Software. But he didn't want this presumably negative practice to color the more mundane competitive practices of high-frequency traders.

"There is algorithmic terrorism and then there is reverse engineering, which is probably just part of good business practice," Bates said.

The day when all of our society's critical systems will be completely controlled by artificial intelligence algorithms which move at speeds and with motives and objectives we can scarcely comprehend fast approaches. I wonder if we will notice. Is it already here?