Sunday, December 27, 2009

Trading strategy: Sniffer programs

It is double pleasure to deceive the deceiver

Its been quite sometime since algorithmic trading was introduced on the street and ever since that, these sharp, cutting-edge algo's have been craftily used to beat their mortal counterparts. Now, we have now reached a stage wherein one algo is made to beat another algorithm. This is called "gaming". Lets call these cool next-gen algos as bots (it adds a true gaming feel ;-) ). These bots are basically used to perform only one function extremely well, track down other algos and either use this information to go along with the tide and make profit or work against these algorithms' strategies. These bots are called sniffers. They listen on the network traffic and try to detect patterns in the orders sent. A very basic example of what a sniffer does was explained in my previous post on High Frequency trading in strategy number 3. It explains how HFT traders used sniffers to exploit the naive algos and book profits by buying at a less price and selling at high price to these algos a fraction of a second faster.

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