"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Saturday, July 14, 2012

High Frequency Terrorism

There is a real fear in the markets now and it is not being caused by Europe, LIEbor, Linda Green, London Whales, etc.  The fear is focused on the structure of how prices are discovered and assets/risk are transferred to willing participants.  Bad algorithms have been treacherous in the past, to put it lightly.  The debate has been focused so much on the ways exchanges have destroyed their reputations by selling enhanced data feeds with your trade information in it.  Every time you trade, your order is routed to a given location to be matched and whether it executes AON, filled 100 blocks in 5 minute intervals at VWAP, cancelled and readjusted stop limit, adjustments to limit order prices/sizes, etc, is recorded and given an account number.  This data is grouped and sold by exchanges and market centers to participants with computer capable of processing and utilizing the encoded "enhanced data feed".  This insight into quantifiable market participant behavior is on a material level and could be argued as being insider information.  

Now imagine the smartest minds we have focused on and picture their intent not being keen on ROI but on chaos and havoc.  Imagine someone has all this information regarding given perceptions of all participants within the US capital market structure, from equities to futures to commodities to currency to bonds for any given millisecond.  Imagine that the Russian gov't, Chinese gov't, and Iran gov't had access to this information and in a coordinated effort decided to attack and manipulate the US markets through high speed access and rapid flows of orders that could trick machines and send errant signals regarding the reality of the market at any given time.  The recent mess with Facebook and BATS have shown the vulnerabilities of our exchange centers and regulators. 

Most of the national focus here in the US has been portrayed as something that is contained with our boarders, however should something more sophisticated (Stuxnet and Flame?) be deployed within our market structure (perhaps through those shell brokerages tied to Al-Queada we've heard about) only then will the focus change.  We need to recognize and consider the probability of something like this happening.  

Page 2, Paragraph 3 of Economic Warfare: Risks & Responses:

Perhaps its time we pressure the CFTC and SEC to reach a definition already on HFT and get their shit in line.  This whole mess of a capitalist market is primed to collapse at any moment.  No one is ready, not the exchanges, not the regulators, not the participators, not the governments, no one.  We have no back up should assets prices drop like they did on May 6, 2010 and not rebound.  Imagine more MFG's and PFG's vaporizing client money as commodity prices go haywire, like the Oil Complex did (more).

As "normalcy bias" continues to grip those involved in the debate, we must focus on the shared vulnerability to damage by a rouge nation or coordinated behavior by nations fighting a battle that isn't on a the typical battlefield.  Picture World War 3 being a financial war, not a weaponry war.

Think about it.  The Department of Defense Irregular Support Warfare Program is: