Alexander Osipovic, Wall Street Journal, has an excellent piece on some unintended consequences of algorithmic trading, here…
“The episode was caused by a standoff between two firms whose algorithms entered a loop, racing each other to be the market’s biggest player, according to Emergent Trading, a small Chicago-based firm that said it was one of the two dueling traders.”…
”After Emergent entered the Eurodollar market, it discovered there was an advantage to quoting prices for more contracts than any other market maker. The benefit: If another trader bought or sold Eurodollar futures, executing against quotes from different market-making firms, the market maker with the biggest quote would get notified 10 millionths to 20 millionths of a second before its next-biggest competitor, Mr. Richardson said.
That is enough time for a quick trader to infer that the price of Eurodollar futures is moving up or down, and to use that knowledge to profit before anyone else.”…
“Emergent tweaked its algorithms to ensure it always had the largest quote—but its rival did the same. So if Emergent posted a quote for 2,000 contracts, the other firm would post a quote for 2,010 contracts a split-second later, for instance. The two firms raced until they hit a maximum size limit, then dropped down and started over, multiple times a second, Mr. Richardson said.”
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