Information Overload Bots in the Market?

Warning: Information Overload bots at work?

Information Overload is often thought of as an annoyance and a productivity killer – but there are far more nefarious aspects to it, such as spreading disinformation that misleads competitors, which can in turn disrupt markets.

Alexis Madrigal, writing in the Atlantic, reported that Jeffrey Donovan, a software engineer at Nanex, a data services firm, uncovered the activity of trading bots in electronic stock exchanges that send thousands of orders a second. The orders have buy and sell prices that are not near to market prices, meaning they would not ever be part of a real trade. The activities of these bots are not noticeable unless viewed on an extremely small time scale, in this case just milliseconds.

Donovan noticed the strange activity when looking for causes of the May 2 “Flash Crash” in the Dow, when it plunged nearly 1,000 points over a few minutes. He managed to plot the activity, and found distinct patterns emerge. The patterns show that the bots are making these extremely quick and non-serious orders (meaning with no intention of buying or selling anything) at almost all times.

Donovan’s theory, although not universally supported, is that rival trading companies could use the bots to introduce noise into the market, and use the delay caused by the noise to gain a millisecond advantage in trading, which in high frequency trading, may be significant.

There are other theories to explain the activity, including that the bots are actually real trading algorithms being tested, that they are a financial radar that is probing the market, and even that they are an emergent AI of sorts. Ultimately, no one really seems to know what the bots are doing or whom they belong to.

Regardless of the motives of these mysterious bots, they raise the specter of using Information Overload as a weapon, whereby you distract your competitor with information noise.

It is possible that the introduction of these orders on a timescale small enough in order to avoid detection may have played a part in the May 2 crash, and may play a role in future crashes. However, Madrigal notes in his article that, although Donovan believes that this kind of bot activity may have been a factor on May 2, he also stresses that there were many other variables, making assigning blame next to impossible.

Can Information Overload be used as a disruptive tactic? The answer is, of course it can. As we introduce more and more information into our lives, the potential to spread misinformation and to game the systems that filter and manage that information grows exponentially.

Cody Burke is a senior analyst at Basex.

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