The Dow Jones has been found to be flooded with software bots that are exhibiting strange patterns of behaviour.
According to the Atlantic, a security firm called Nanex was investigating the market behaviour which led to the ‘flash crash’ of May 6th, which saw the market drop by 1000 points in a matter of minutes. It found some strange patterns in the milliseconds preceding the drop, caused by software bots called High Frequency Trading algorithms posting thousands of stock quotes without any direct intentions to trade.
Such software is legal under US law – allowing human high frequency traders to make transactions at an extremely fast rate. The benefit of such fast transactions comes in the form of a ‘liquidity rebate’, which gives every participant in a transaction a rebate of around 0.25 cents regardless of whether the trade makes profit or loss. High frequency trading can therefore generate a lot of money.
In this case however, much of the strange behaviour is occurring without any trading firm sending out orders for the algorithms to react to, leading to an informal consensus that the patterns are simply a result of “a dynamical system that can enter oscillatory/unstable modes of behaviour.”
However, despite the casual attitude displayed by the financial sector, Zero Hedge alleges that the behaviour is an attempt to manipulate the market by artificially inflating share prices by the deployment of thousands of fake stock quotes prior to a transaction, leading the website to state that “we no longer have a market, but merely a daily recurring crime scene.”