……There are two rather more predatory strategies. One is called algo-sniffing. Here, a super-fast computer tries to find other computers going about their everyday business of buying or selling shares, and figures out what they’re going to do and when.
The algo-sniffer can then get ahead of the game and exploit the slower computer. And of course you could have algo-sniffer-sniffers and algo-sniffer-sniffer-sniffers in a high-frequency arms race. No wonder speed can be so important.
And finally, a particular sub-category of the algo-sniffer is the spoofer, which deliberately makes fake offers designed to lure other computers to show their hands, then cancels the offers. Spoofing might be illegal, or at least against the rules of stock exchanges, but it’s hard to prove that it’s going on.
Andrew Haldane, executive director for financial stability at the Bank of England:
“What we have out there now is this complex array of multiple mutating interacting machines, algorithms. It’s constantly developing and travelling at ever higher velocities. And it’s just difficult to know what will pop out next. And that’s not an accident waiting to happen, that’s an accident that has been happening with increasing frequency over the last few years.”
via BBC News – High-frequency trading and the $440m mistake.