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Are there any automated trading firms that are specifically focused on exploiting the unintended combined behavior of multiple systems operating in an environme

Are there any automated trading firms that are specifically focused on exploiting the unintended combined behavior of multiple systems operating in an environment where they modify both their own and each others environment (the stock market being that environment)? While it might be tractable for an organization to construct their system such that it can project its own consequences to its own sphere of interest, once you mix in other systems operating in the same area all bets are off. And once you have the majority of trades being performed by automated or rules-based systems, you ought to detect their parameters through assuming reasonable things about those systems (processors which are limited to a certain number of operations, bounding the latency on their response to change, limitations on the complexity of the systems or rules being used due to needing to be comprehensible to human analysis in its source form, etc) and looking for predictable patterns created primarily by the interactions between those automated systems. Everything I have read about automated trading systems (which of course is always very light on details due to everything being extremely valuable and proprietary) seems to indicate that most automated systems are designed as if they are operating in an environment where the other traders are primarily humans. If anyone has come across indication that they are treating the movements of the market as the output of deterministic software systems rather than 'natural' trading, I'd be appreciative of a link!

makrolof 9y ago
Hi. Well, yes, lots of people has come across that fact. But the guys able to exploit it are market makers. They look for kinds of repeated patterns in the form of orders, stops, time of day... And they later trick on them until they stop working. As you noticed, knowing you'll get someone to buy your thing at a relative price at some specific time and day can be very profitable. Still, it's difficult to read something "worthwile" about this.
mrchicity 9y ago
Depends how you mean exploit. Not a lawyer, but to a first approximation, doing anything in markets to elicit a response from others rather than for bona fide economic reasons is illegal market manipulation so active exploitation is rarely done at serious firms. It's usually individual day traders or offshore boiler room type groups. Passive exploitation, as in detecting predictable future actions, is probably common, if unintentional. Most automated traders are searching for anything that predicts an imminent price change, on average. Predicting future actions and predicting prices are roughly equivalent. As you move along the continuum from straightforward arbitrage to esoteric black box quant stuff, it becomes more and more difficult to understand how or why a trade even works. I'm sure there are models that predict prices very well solely because they've locked on to some combination of tells unintentionally leaked by another algo. Here's an example of someone who built a model to detect algorithmic iceberg orders reloading: https://mechanicalmarkets.wordpress.com/2015/04/30/market-data-patterns-order-anticipation-and-an-example-trading-strategy/ https://mechanicalmarkets.wordpress.com/2015/04/30/market-da... - he makes an interesting point that any quant data mining order book event sequences that predict strong price movements would find the same pattern easily.

makrolof 9y ago

Hi. Well, yes, lots of people has come across that fact. But the guys able to exploit it are market makers. They look for kinds of repeated patterns in the form of orders, stops, time of day... And they later trick on them until they stop working. As you noticed, knowing you'll get someone to buy your thing at a relative price at some specific time and day can be very profitable. Still, it's difficult to read something "worthwile" about this.

mrchicity 9y ago

Depends how you mean exploit. Not a lawyer, but to a first approximation, doing anything in markets to elicit a response from others rather than for bona fide economic reasons is illegal market manipulation so active exploitation is rarely done at serious firms. It's usually individual day traders or offshore boiler room type groups. Passive exploitation, as in detecting predictable future actions, is probably common, if unintentional. Most automated traders are searching for anything that predicts an imminent price change, on average. Predicting future actions and predicting prices are roughly equivalent. As you move along the continuum from straightforward arbitrage to esoteric black box quant stuff, it becomes more and more difficult to understand how or why a trade even works. I'm sure there are models that predict prices very well solely because they've locked on to some combination of tells unintentionally leaked by another algo. Here's an example of someone who built a model to detect algorithmic iceberg orders reloading: https://mechanicalmarkets.wordpress.com/2015/04/30/market-data-patterns-order-anticipation-and-an-example-trading-strategy/ https://mechanicalmarkets.wordpress.com/2015/04/30/market-da... - he makes an interesting point that any quant data mining order book event sequences that predict strong price movements would find the same pattern easily.