Stock Manipulators

A new commentary every Wednesday - May 20, 2015

How Hackers are Manipulating U.S. Stock Markets

Stock markets have from time to time been manipulated throughout the years in many diverse ways. The temptation of gain, even if illegal, is patently irresistible to some.

In April, 2014, I fulminated about a new kind of "front-running" in the stock markets. Outlined below is an astoundingly more productive way than the heretofore old fashioned way of front running: buying on insider information; the kind of illegal trading that ultimately caused Martha Stewart to do time. Her biggest mistake was denying having done so

I think everyone is aware that digital impulses on the various computer networks travel at various speeds, according to the "bandwidth" of the system. All of us who switched from the telephone company "dial-up" systems to cable, usually offered by companies offering television programming, already know this. Fiber-optic cables permit electrical impulses to travel at even faster speeds. Fiber optic networks are far more costly to construct than those made by telephone wires or coaxial cables and are usually built out in areas of limited physical size.

The second piece of information in this dilation has to do with programming a unique computer algorithm designed to do something now termed "automatic front running." In mathematics and computer science, an algorithm is a "self-contained step by step set of operations, coded to perform calculations, data processing and automatic reasoning" (Wikipedia). We're talking about robots, here. Incidentally, the word "algorithm," does not appear in my Webster's Collegiate Dictionary, 2000 edition.

Neither does the word "spoofing," if related to computers. There are various, insidious ways to fool our computer software and hardware by misdirection as to the source of a digital transmission. Combining spoofing that is very difficult, if not impossible to trace, with exceedingly quicker systems, can permit hackers to engage in harmful trickery. I've a nagging suspicion that this sort of manipulation of stock markets is continuing to be exploited by hackers, to the detriment of other investors.

It should not be difficult for hackers to determine who are clients of brokerage houses. You undoubtedly are aware that buying makes prices go up (and selling makes prices go down). Some talented hackers have devised programs—that is, written the code—that directs their computers to intercept legitimate orders on their way to stock exchanges' computers. They don't hijack the order. They outrace it. These criminals need a warehouse full of computers and optical cables located near a major exchange to literally spin straw into gold. The operative word is "quicker." The slower legitimate order arrives, but results in the investor paying a slightly higher price if the buy is specified to be "at market."

Then, utilizing electronic smoke and mirrors, the hackers' robot computers quickly shunt the gains to the hackers' offshore accounts—all done automatically by electronic, computerized magic. Nothing is touched by the hands.

No, this is not just good old American know-how. Undeniably, this is gaming the market, and surely is illegal. Catching the miscreants is another matter, for things happen on the Internet at a speed close to that of light.

My first hint that something was awry came in 2010. I was trying to predict the future of the Standard and Poor's Index made up of the composite average price of 500 stocks, by identifying the formations of the price-ranges of 500 stocks listed by the Dow-Jones company over several decades. I might just as well have been throwing chicken bones on the ground and calling it "technical analysis."

However, the daily exercise of watching this huge basket of stocks made me especially sensitive to sudden hiccups in the stock market that made no sense as far as market fundamentals were concerned.

Something extraordinary happened on May 6th, 2010. The entire S&P index did not only hiccup, but had what has been termed a "Flash Crash." No fundamental reason has ever been given for 500 stocks to lose a billion dollars of value for a split second. Once the price had dropped precipitously, I suspect a robot computer (probably many, all working in concert), automatically bought a bundle at a radically reduced price. I could imagine that millions of dollars was soon dumped into some hacker's account—or very likely a team of hacker's accounts, once the market quickly recovered. There could be many mutations on this scam. Criminals could magnify the result exponentially by applying this to options contracts.

The big thing that makes all of this so economically dangerous nowadays, is that as huge, snowball-size sell or buy orders are rolling down the hill, computers owned by money managers not anyway guilty of scamming or front running are also triggered automatically to follow suit. This is the main reason the stock market has become insanely volatile—the other being the fact that trading volume has expanded beyond anyone's wildest expectations. To an old market observer, the swings are breath-taking.

We do not need market crashes, especially if they are caused more or less artificially, by some kind of haywired computer genius, or a team of them working in concert. Whoever (it is) (they are), I'm certain someone became outrageously wealthy in that one instance on May 6th of 2010 in less time than it takes to blink an eye. The U.S. Securities and Exchange Commission apparently was not prepared to prevent this from happening. It is bound to be repeated again and again until people who devise and operate these scams are locked-up.

The FBI is supposed to have a whole division within the Bureau working to prevent this new kind of computer-age theft. We need to wish the FBI Geeks Godspeed.

-Phil Richardson, Observer and Storyteller.

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