If Hackers Steal a Bank's Quant Code, Do We Still Have a Functioning Market?

http://emptywheel.firedoglake.com/2011/03/01/if-a-tbtf-bank-lost-its-quant-code-to-chinese-hackers-and-no-one-knew-would-we-still-have-a-functioning-market/

by stsmytherie • 15 years ago

13 10 15 years ago

emptywheel.firedoglake.com

ig14• 15 years ago

Essentially the problem is the same in the case of stolen documents or quant code, it allows insider trading. And frankly it's a lot easier to make money from insider trading on M&A activity than trying to understand how someone's trading code works.

JSig• 15 years ago

The title implies that we have functioning market today. Let's say a functioning market is something that provides real time price discovery and efficient transaction execution.

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?

yummyfajitas3• 15 years ago

The manipulation being referred to is most likely some form of layering. Basically, since you know how some bank will respond, you can manipulate the bank's trading program and rob the bank.

This has already occurred even without code thefts. Remember Trillium?

http://blogs.reuters.com/felix-salmon/2010/09/14/trillium-wa...

ig14• 15 years ago

More likely is things like front running, where you use buy/sell something upfront when you know someone else is about to move the market price

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.

jwb119• 15 years ago

arguably, we actually have a more efficient market if the code is in the open or if M&A deals are revealed..

natnat• 15 years ago

I don't really see how much damage hackers could do with quant code if they don't have the capital to execute significant trades.

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.

If Hackers Steal a Bank's Quant Code, Do We Still Have a Functioning Market?

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