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> When jokes are illegal and harmful algorithms are legal It worries me when even people on HN are talking about banning 'harmful' algorithms. The SEC shouldn

> When jokes are illegal and harmful algorithms are legal It worries me when even people on HN are talking about banning 'harmful' algorithms. The SEC shouldn't get involved. The people whose algorithms ran up the stock and lost a bunch of money over a joke will learn their lesson, or will go out of business, soon enough.

freehunter 12y ago
It's the SECs job to regulate securities and exchanges. They regulate people, they can regulate algorithms. It's not like Congress is passing a law that regulates what encryption standards can and cannot be used. It's the SEC regulating trade on the stock market no matter who or what is conducting the trades. Whether they should or should not ban it, it's well within their authority. You're trying to make it into an all-computing type of issue. It's not. There is no slope, and it's certainly not slippery.
- zorked 12y ago
  The SEC can get involved. The question is whether they should. See, people who write "bad" algorithms already get punished by the market and lose money. They already have an interest in improving. What would a regulation against "bad" algorithms even look like?
  - shasta 12y ago
    They should be forced to give some of those losses back.
    - cbsmith 12y ago
      ? For the most part, they tend to be the ones who lose.. so they've already given them back.
    - CamperBob2 12y ago
      They did, before the end of the session.
    - shasta 12y ago
      "Giving back losses" was supposed to be humorous. Apologies.
  - bsder 12y ago
    Simple. All trades have a random time from 0-10 seconds prepended as a delay before the exchange starts the process to execute the trade. Suddenly, microsecond trading algorithms are dead.
    - kasey_junk 12y ago
      Nope. That existed for many years in implementation details at exchanges and the games were worse. What actually happened in those cases is liquidity went away faster in drastic moves and the spreads had to account for the risk. Further, you'd have all manner of snake oil consultants that would be selling true secrets of the NASDAQ randomizer (this exact thing happened before the exchanges standardized colocation. Guys would claim only they knew where in a data center had the shortest cable runs for instance). All of that inefficiency gets priced into the spread and is paid by all market participants. If you really want to get rid of microsecond trading (I don't know why you'd care honestly, but if you did) get rid of the sub-penny rule. Make market making algorithms truly compete on price. Speed will still be important for canceling orders/gathering information, but you could counteract it by trying to do what we actually want the algos to do. Discover the right price cheaply.
    - harryh 12y ago
      No, this is wrong. You've simply increased the complexity and hence the risk of submitting a bid/ask which is going to lead to increased spreads and increased costs for people who buy and sell stock.
      - bsder 12y ago
        Um, so? The goal here is to cut down on automated meltdowns caused by people trying to get a microsecond jump on everybody else. A stock price is supposed to have some relation to the value of the company. With HFT, it is pretty clear that we left that realm many moons ago. A random time within 10 seconds is hardly going to affect the stock price significantly. The fact that stock is going to be a couple of pennies more expensive isn't exactly going to gather any sympathy from me. And, a bigger bid/ask spread will stop stock price meltdowns which are more momentum-based (aka trader driven) rather than actual real information (aka business driven).
  - cbsmith 12y ago
    > See, people who write "bad" algorithms already get punished by the market and lose money. You've misunderstood what is meant by "bad" algorithms. They aren't universally "bad". The vast majority of the time they make a ton of money. The problem is, the reason they make money is because they have limited safe guards that protect it from doing something stupid 99% of the time, but the remaining 1% is left a mess in order to ensure that 99% of the time they execute faster than the next guy. Unfortunately, they are an increasingly dominant force during that 1% window because they are a few nanoseconds faster to make a trade the rest of the time. > What would a regulation against "bad" algorithms even look like? You don't regulate the algorithm, just like you don't regulate against bad traders. What you do is set the rules so that the risks & rewards favour a healthy ecosystem. If sub millisecond trading yielded no benefit, it'd do a lot to prevent problems.
cbsmith 12y ago
> It worries me when even people on HN are talking about banning 'harmful' algorithms. Why? Algorithms can be harmful as much as anything else. > The people whose algorithms ran up the stock and lost a bunch of money over a joke will learn their lesson, or will go out of business, soon enough. The problem is that won't happen. The advantage of trading stupider, but slightly faster, than the other guy is too huge. Sure, sometimes you lose money, but most of the time you make money. It's classic game theory: the stupider but faster algorithm benefits from the slower but smarter algorithms... unfortunately though, it damages the ecosystem, and if it is allowed to continue it might actually grow to kill the ecosystem. While in theory, it is improving the liquidity of the system, the way the game is rigged, the rewards for the improved liquidity far outweigh the benefits. > The SEC shouldn't get involved. I'd argue quite the contrary. Now, the SEC shouldn't be saying, "you can use this algorithm" and "you can't use that algorithm", but I think there is a case to be made for imposing trading rules that don't reward a 5% speed improvement over 100ns equally to a 5% speed improvement over 100s.
- harryh 12y ago
  None of what you said makes any sense. I can trivially implement a trading algorithm that is faster than anything else by ignoring the outside world and choosing a price at random. Algorithmic traders don't benefit by simply being faster, they benefit by being faster to the correct price.
  - Crito 12y ago
    "Correct price" is not boolean. Speed and accuracy both have degrees and they trade off. High frequency traders use algorithms which are not as accurate as possible, but are fast. They knowingly use algorithms which have compromised accuracy for speed. They therefore deserve zero sympathy when their algorithms fuck up. They knew what they were getting into, so they should accept the consequences with grace.
    - icebraining 12y ago
      But the context wasn't people saying we shouldn't have sympathy, but that they should be illegal.
skybrian 12y ago
Anyone else who happened to buy at that time was also affected. There are always less-informed bystanders, and an efficient market is supposed to be about getting prices right. Adding noise to the signal isn't helpful. I agree, though, that it will probably self-correct.
- icebraining 12y ago
  Then we should also punish those less-informed bystanders, since they're compounding the noise.
  - skybrian 12y ago
    Well, they are "noise traders" but if they're not coordinated by a particular signal, on average it should balance out. In any case, I don't really care much about punishment. I do care about fixing things.
Osiris 12y ago
Except that harmful algorithms aren't limited to only harming other algorithms. They manipulate the stock price for every investor, including small investors. The SEC should be involved to protect the small investors from the effects of bad actors.
- icebraining 12y ago
  "Manipulate" is a just a loaded term for influence, which is what every investor does by buying and selling. If one buys shares because some other person's algorithm pushed them up, isn't (s)he gambling just like them? Why should (s)he be protected?
  - sosborn 12y ago
    > "Manipulate" is a just a loaded term for influence, which is what every investor does by buying and selling. True, but remember that the degree of influence can vary by several orders of magnitude.
sumedh 12y ago
> The SEC shouldn't get involved. The people whose algorithms ran up the stock and lost a bunch of money What if the firm which loses money has cascading effect on the market?

freehunter 12y ago

It's the SECs job to regulate securities and exchanges. They regulate people, they can regulate algorithms. It's not like Congress is passing a law that regulates what encryption standards can and cannot be used. It's the SEC regulating trade on the stock market no matter who or what is conducting the trades. Whether they should or should not ban it, it's well within their authority. You're trying to make it into an all-computing type of issue. It's not. There is no slope, and it's certainly not slippery.

zorked 12y ago
The SEC can get involved. The question is whether they should. See, people who write "bad" algorithms already get punished by the market and lose money. They already have an interest in improving. What would a regulation against "bad" algorithms even look like?
- shasta 12y ago
  They should be forced to give some of those losses back.
  - cbsmith 12y ago
    ? For the most part, they tend to be the ones who lose.. so they've already given them back.
  - CamperBob2 12y ago
    They did, before the end of the session.
  - shasta 12y ago
    "Giving back losses" was supposed to be humorous. Apologies.
- bsder 12y ago
  Simple. All trades have a random time from 0-10 seconds prepended as a delay before the exchange starts the process to execute the trade. Suddenly, microsecond trading algorithms are dead.
  - kasey_junk 12y ago
    Nope. That existed for many years in implementation details at exchanges and the games were worse. What actually happened in those cases is liquidity went away faster in drastic moves and the spreads had to account for the risk. Further, you'd have all manner of snake oil consultants that would be selling true secrets of the NASDAQ randomizer (this exact thing happened before the exchanges standardized colocation. Guys would claim only they knew where in a data center had the shortest cable runs for instance). All of that inefficiency gets priced into the spread and is paid by all market participants. If you really want to get rid of microsecond trading (I don't know why you'd care honestly, but if you did) get rid of the sub-penny rule. Make market making algorithms truly compete on price. Speed will still be important for canceling orders/gathering information, but you could counteract it by trying to do what we actually want the algos to do. Discover the right price cheaply.
  - harryh 12y ago
    No, this is wrong. You've simply increased the complexity and hence the risk of submitting a bid/ask which is going to lead to increased spreads and increased costs for people who buy and sell stock.
    - bsder 12y ago
      Um, so? The goal here is to cut down on automated meltdowns caused by people trying to get a microsecond jump on everybody else. A stock price is supposed to have some relation to the value of the company. With HFT, it is pretty clear that we left that realm many moons ago. A random time within 10 seconds is hardly going to affect the stock price significantly. The fact that stock is going to be a couple of pennies more expensive isn't exactly going to gather any sympathy from me. And, a bigger bid/ask spread will stop stock price meltdowns which are more momentum-based (aka trader driven) rather than actual real information (aka business driven).
- cbsmith 12y ago
  > See, people who write "bad" algorithms already get punished by the market and lose money. You've misunderstood what is meant by "bad" algorithms. They aren't universally "bad". The vast majority of the time they make a ton of money. The problem is, the reason they make money is because they have limited safe guards that protect it from doing something stupid 99% of the time, but the remaining 1% is left a mess in order to ensure that 99% of the time they execute faster than the next guy. Unfortunately, they are an increasingly dominant force during that 1% window because they are a few nanoseconds faster to make a trade the rest of the time. > What would a regulation against "bad" algorithms even look like? You don't regulate the algorithm, just like you don't regulate against bad traders. What you do is set the rules so that the risks & rewards favour a healthy ecosystem. If sub millisecond trading yielded no benefit, it'd do a lot to prevent problems.

cbsmith 12y ago

> It worries me when even people on HN are talking about banning 'harmful' algorithms. Why? Algorithms can be harmful as much as anything else. > The people whose algorithms ran up the stock and lost a bunch of money over a joke will learn their lesson, or will go out of business, soon enough. The problem is that won't happen. The advantage of trading stupider, but slightly faster, than the other guy is too huge. Sure, sometimes you lose money, but most of the time you make money. It's classic game theory: the stupider but faster algorithm benefits from the slower but smarter algorithms... unfortunately though, it damages the ecosystem, and if it is allowed to continue it might actually grow to kill the ecosystem. While in theory, it is improving the liquidity of the system, the way the game is rigged, the rewards for the improved liquidity far outweigh the benefits. > The SEC shouldn't get involved. I'd argue quite the contrary. Now, the SEC shouldn't be saying, "you can use this algorithm" and "you can't use that algorithm", but I think there is a case to be made for imposing trading rules that don't reward a 5% speed improvement over 100ns equally to a 5% speed improvement over 100s.

harryh 12y ago
None of what you said makes any sense. I can trivially implement a trading algorithm that is faster than anything else by ignoring the outside world and choosing a price at random. Algorithmic traders don't benefit by simply being faster, they benefit by being faster to the correct price.
- Crito 12y ago
  "Correct price" is not boolean. Speed and accuracy both have degrees and they trade off. High frequency traders use algorithms which are not as accurate as possible, but are fast. They knowingly use algorithms which have compromised accuracy for speed. They therefore deserve zero sympathy when their algorithms fuck up. They knew what they were getting into, so they should accept the consequences with grace.
  - icebraining 12y ago
    But the context wasn't people saying we shouldn't have sympathy, but that they should be illegal.

skybrian 12y ago

Anyone else who happened to buy at that time was also affected. There are always less-informed bystanders, and an efficient market is supposed to be about getting prices right. Adding noise to the signal isn't helpful. I agree, though, that it will probably self-correct.

icebraining 12y ago
Then we should also punish those less-informed bystanders, since they're compounding the noise.
- skybrian 12y ago
  Well, they are "noise traders" but if they're not coordinated by a particular signal, on average it should balance out. In any case, I don't really care much about punishment. I do care about fixing things.

Osiris 12y ago

Except that harmful algorithms aren't limited to only harming other algorithms. They manipulate the stock price for every investor, including small investors. The SEC should be involved to protect the small investors from the effects of bad actors.

icebraining 12y ago
"Manipulate" is a just a loaded term for influence, which is what every investor does by buying and selling. If one buys shares because some other person's algorithm pushed them up, isn't (s)he gambling just like them? Why should (s)he be protected?
- sosborn 12y ago
  > "Manipulate" is a just a loaded term for influence, which is what every investor does by buying and selling. True, but remember that the degree of influence can vary by several orders of magnitude.

sumedh 12y ago

> The SEC shouldn't get involved. The people whose algorithms ran up the stock and lost a bunch of money What if the firm which loses money has cascading effect on the market?