Mysterious Algorithm Commanded 4% of Trading Activity Last Week

This is an interesting story that talks about how 4% of trading traffic last week came from a mysterious source and didn't actually do anything. 

The stats are alarming.

A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity. The motive of the algorithm is still unclear.

The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday.

I have several friends in the industry who each have a method for timing the stock market and offered that as a service to their customers.  For a while those signals were extremely accurate with maybe a 10% error rate.  When I asked them what causes the errors the answer was simple,  "Day Traders".  As you may know a day trader is a person who buys up a stock, watches it for the day, and promptly sells it before the market closes.  In a rare occasion the day trader may hold on to them for a week but the intent is to ride the waves and make money betting on the direction.  (long or short)

Sounds like a good way to make some quick money until you factor in how many day traders there are and how much money they move at any given second.  In fact an army of day traders can sway the market several points and create artificial "demand" for stocks that would otherwise be undesirable.

The trick to making this work is to move a lot of money in a very short amount of time, the trading floor will then respond and cause the market to no longer react as you would predict and, in rare cases, cause it to crash.

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Related Web URL: http://www.cnbc.com/id/49333454