If Hackers Steal a Bank's Quant Code, Do We Still Have a Functioning Market?
emptywheel.firedoglake.com
emptywheel.firedoglake.com
I think it's fair to say that a clever person would not have to steal a bank's quant code to take down the market. I'm sure some element of the infrastructure could be targeted.
Maybe a better question to ask is, Do we currently have a fair market and if Hackers steal a bank's quant code would we have less of a fair market?
I suggest this question based on the following quote:
"The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways," said Assistant U.S. Attorney Joseph Facciponti [in regards to the code taken by Sergey Aleynikov]
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=...
Here we have the bank admitting that the software can be used to "manipulate markets." With these banks having quarters with no losing trading days, are we to believe that they are not using this software to manipulate markets?
This has already occurred even without code thefts. Remember Trillium?
http://blogs.reuters.com/felix-salmon/2010/09/14/trillium-wa...
Layering is a completely different practice which involves creating an impression of volume when there isn't one (which is strictly regulated in the equities market, less so in others).
It's not uncommon for firms to try and exploit flaws in each others trading strategies, for example a rooky mistake in pricing algorithms is to use the last traded price as the basis of your price, so a common strategy in infrequently traded items is causing a price spike causing the rooky algorithm to go way off market allowing them to be taken to the cleaners.
I've seen firms manipulate prices in weird monotonic ways in order to see how other firms algorithms work in order to reverse engineer them.
I've done similar things myself in order to figure out the internals of exchanges, in one case I was even able to identify an exchange had incorrectly configured it's kernel tcp settings causing an irregular latency spike in their internal systems.
Trading algorithms to some extent have to be designed to protect against vulnerabilities, not because of code theft, but because people are getting very good at doing remote reverse engineering based upon observed inputs/outputs.
In contrast, if you can figure out how to implement layering in such a way that their system acts on it, or use price spikes, or something of that nature, you don't need to beat them on speed. You manipulate them, they trade against you as fast as they want to, and you win.
"...somebody who knew how to use this program could use it to manipulate markets in unfair ways," said Assistant U.S. Attorney Joseph Facciponti [in regards to the code taken by Sergey Aleynikov]
(Aleynikov is the guy who allegedly stole code from Goldman.)
If they're working independently, there is no way they could have anywhere near the amount of capital as Morgan Stanley. If they're stealing the code on behalf of the Chinese government, we should probably be more worried that the Chinese government is actively trying to steal from American banks.