Walter Marlowe on algorithmic trading

Written by Walter Marlowe Tuesday, 22 May 2012 08:18
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I’ve previously written about “Program Trading” / “Algorithmic Trading” in my Blog. This type of computer generated, quantitative based trading by hedge funds which literally generate thousands of trades within minutes account for up to 40% of daily stock exchange volume in the New York and London.


Program Trading is responsible for significant market distortions causing excessive and unnecessary volatility and was entirely responsible for the so-called “Flash Crash” on the NYSE in 2010 (the fall-out of which was the need for the Exchange to then undue thousands of trades which distorted market activity for the day).

Program Trading also defeats the purpose of stock markets as vehicles for investment and savings. We have gaming casinos for this sort of activity, we don’t have to undermine the financial system to accommodate it.


I read with interest in the FT that a couple of Norwegian (!) day traders succeeded in spotting flaws in the algorithms of several major trading institutions programmed trading activities. Having done so (and making small but useful profits, small in comparison to the size of the trading programs) they were charged with “market manipulation” by the local securities regulator.


The case went to court and the judge found the defendants innocent on the basis that their activities actually improved “market efficiency”. The traders have become, along with some kindred Swedish day traders, celebrities. They are seen as “Robin Hoods” by local investors.


The trial testimony revealed that the programmed trades that had significant flaws, which the Norwegians and others were able to exploit and “scalp” for profits, were algorithmic programs written and used by none other than: UBS Bank, Morgan Stanley and Deutsche Bank, hence the Robin Hood  aspect of the story.The program flaws among other things involved the banks (the foundation of our financial system) writing algorithms that literally took the wrong side of the trades that were executed. Nothing exotic, just the difference between “A or B, buy or sell”.


Additionally, the day traders were able, through nothing more than consistent observation of trades executed by the bank’s programs, to understand the algorithms used and hence they were able to predict the structure of the ensuing trades that would be generated. There was no “hacking” involved, nothing illegal, nothing of an “insider” nature, quite the opposite as a matter of fact.


Who needs market regulation when you have human frailty?


Walter Marlowe is a graduate of New York University’s Stern School of Business. Walter has more than 30 years experience in international banking and corporate finance having started his career with Bankers Trust Company, New York.He has been an active private investor in both listed and alternative investments for more than forty years. He lectures, consults and trains extensively in Europe and emerging markets and has authored a book on venture capital investing.

During the course of his career he was a founding member of the Bankers Trust. management buy-out group, London, Head of Acquisition Finance for Security Pacific Hoare Govett, a senior vice president of Instinet Corp., one of the world’s largest agency equity brokers and head of Real Estate Investment Banking for a Gulf based investment bank.

He blogs @

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