DARPA Asks HFT Traders How Hackers Will Crash The Market

Tyler Durden's picture

Having been responsible for the biggest flash crashes in recent years, it is no surprise that when it comes to the market's growing structural vulnerabilities, high frequency traders have emerged as the primary authority on how to crash the market in the blink of an eye. Which is perhaps why none other than the Pentagon is seeking advice from HFTs on how hackers could "unleash chaos" in the US financial system.

According to the Wall Street Journal, the Department of Defense’s research arm, the Defense Advanced Research Projects Agency, better known as DARPA, has been consulting with executives at HFT firms and quant hedge funds as well as people from exchanges and other financial companies, over the past year and a half. Officials described the effort as an early-stage pilot project aimed at "identifying market vulnerabilities." The WSJ notes that meeting participants described meetings as informal sessions in which attendees brainstorm about "how hackers might try to bring down U.S. markets, then rank the ideas by feasibility."

Why approach HFTs? Because of all market participants, it is the "high freaks" who, better than anyone, know how to force a market crash at will. The WSJ was a bit more diplomatic:

High-speed traders and quant-fund managers, who use sophisticated computer programs to buy and sell stocks, sometimes in fractions of a second, form the core of the group. Such traders tend to have deep expertise in the inner workings of financial markets and the automated systems that account for huge swaths of trading activity today.

Among the potential scenarios probed by the Pentagon: Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash.

The name of the DOD initiative is the Financial Markets Vulnerabilities Project. Speaking to the WSJ, Darpa officials confirmed the effort, which while unclassified had not been previously reported.

“We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets,” said Wade Shen, who researched artificial intelligence at the Massachusetts Institute of Technology before joining Darpa as a program manager in 2014.

The report is the first tangible evidence of what we proposed back in January 2015, when we asked rhetorically if the US is preparing to blame the next market crash on "Russian Spies" and HFTs. We can now add the generalized "hacker" category to this. For those who may not recall, this is one of the exchanges that was contained in the DOJ complaint:

IGOR SPORYSHEV, the defendant, called EVGENY BURYAKOV, a/k/a "Zhenya,"the defendant, and the following conversation, which was intercepted by the FBI, occurred:

 

EB: Well, I thought about it. I don' t know whether it will work for you but you can ask about ETF. . . . E-T-F. E, exchange.
IS: Yes, got it.
EB: How they are used, the mechanisms of use for destabilization of the markets.
IS: Mechanism - of - use - for - market - stabilization in modern conditions.
EB: For destabilization.
IS: Aha.
EB: Then you can ask them what they think about limiting the use of trading robots. . . . You can also ask about the potential interest of the participants of the exchange to the products tied to the Russian Federation.

There was more but the general gist was clear: the US was setting the stage for putting the blame for an upcoming market crash on not only Russians but Russian spies who were looking to ETFs and HFTs as a mechanism of market "destabilization."

Fast forward to today when the WSJ reports that as part of its "Financial Markets Vulnerabilities Project", DARPA has met with some of the most prominent names in the high-speed trading business, especially those who have been implicated in the shadier aspects of HFT. They include Jamil Nazarali, senior adviser to Citadel which is responsible for around 20% of daily volume in U.S. stock markets. Additionally, another former Citadelite, Misha Malyshev, and CEO of trading firm Teza Technologies, has “advised Darpa on vulnerabilities within the U.S. financial markets,” Teza’s website said. Manoj Narang, CEO of quant hedge fund Mana Partners - and one of the most vocal defenders of HFT practices - said he had advised Darpa, too.

So what will Russian hackers focus on?

Among potential targets that participants have worried could appeal to hackers given their broad reach are credit-card companies, payment processors and payroll companies such as Automatic Data Processing , Inc., or ADP, which handles the paychecks for one in six U.S. workers, participants said.

Adding a sense of theatrical urgency to the DARPA project, the WSJ artistically notes that Manoj Narang, whom we have written about previously on numerous occasions, said he began taking part in the Darpa meetings as a skeptic, thinking the U.S. stock market was resilient and it was unlikely for attackers to cause anything more than temporary damage. But since then, he has gotten more worried. What has the biggest advocate of HFTs most concerned?

One scenario he fears: a hack of a U.S. exchange in which the attacker sends a wave of fake sell orders to every firm offering to buy shares. That could potentially erase hundreds of billions of dollars of market value as prices drop and firms try to cover losses by selling on other exchanges, Mr. Narang said.

What he really means is a "wave of fake sell orders" that isn't launched by HFTs, but by some "unknown" entity sabotaging an equity market whose structure is broken beyond repair thanks to, drumdoll, HFTs.

It gets better: "Project participants have also debated the impact of attackers transmitting false data via the electronic feeds that traders use to monitor stock prices, or publishing “fake news” to shake investor confidence."

Ah yes, because the "non-fake" market, which rewards news of a possible ICBM launch by North Korea by sending stocks surging, will crash following "fake news" which "shake investor confidence." Perhaps the only confusion here is who came up with this idiotic script: the US government or the HFTs, who are and will be desperate to shift blame to "someone else" after the next crash.

Finally, what is the logic behind DARPA's project? According to the WSJ, "the goal is to develop a simulation of U.S. markets, which could be used to test scenarios, Mr. Shen said. Such software would need to model complex, interrelated markets—not just stocks but also markets such as futures—as well as the behavior of automated trading systems operating within them."

Many quantitative trading firms already do something similar, Mr. Narang said. His company won a small contract from Darpa this year to test whether its simulation tool could be used by the agency, according to Mr. Narang and a Darpa spokeswoman.

 

The project isn’t the first time the Pentagon has studied such risks. In 2009, military experts took part in a two-day war game exploring a “global financial war” involving China and Russia, according to “Currency Wars: The Making of the Next Global Crisis,” a 2011 book by James Rickards. The Applied Physics Laboratory at Johns Hopkins University hosted the event, a spokesman there confirmed. Such scenarios might seem far-fetched, but Mr. Shen said it is Darpa’s job to think about futuristic attacks that haven’t happened yet.

For those who are still confused, here is what is going on: HFTs are preparing to scapegoat some other, potentially "Russia government controlled" actor for the upcoming market crash, and Darpa has been brought in to provide credibility and validation to the upcoming charge. 

Our charge at Darpa is to think far out,” Wade Shen, the Darpa program manager said. “It’s not ‘What is the attack today?’ but ‘What are the vectors of attack 20 years from now?’”

In retrospect, the only thing we find surprising about today's WSJ report is that the Fed is not involved (at least not yet) in these Darpa-HFT level talks: after all, in addition to HFTs, whose domination of markets has resulted in market structure that is brittle and fragile and susceptible to fracture and flash crash without warning, and thus responsible for crashes at the micro level, it is none other than the Federal Reserve whose actions over the past decade (and really 104 years) that has led to the biggest macro level asset mispricing, i.e., bubble, in history. As for today's trial balloon that preparations for the scapegoating process are already taking palce, and that it likely will be some "Russian hacker" blamed for the upcoming crash, the fact that the top echelons of the US government are already contemplating "next steps" is the clearest indication yet that the current market bubble is approaching its terminal phase.

Until then, we leave readers with this prophetic observation made by Bank of America this past May:

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Truther's picture

Just an excuse to crash it an blame Putin. Nuff said.

WW3 is coming.

gatorengineer's picture

Yep, plant the story, water it, and let it become a self fullfilling prophecy.  LOL....

Simple fix outlaw HFT.... guess thats too obvious and would expose the real volumes in the Stock Ponzi

Oracle of Kypseli's picture

Maybe, just maybe they are setting up the stage to cancel all sell orders that profitted claiming the hackers did it. Bastards!

Doña K's picture

I will take that to the supreme court. You snooze, you lose.

overbet's picture

Sure with the feds mrkt buy algo never gonna happen, but even if they crashed it 50% itd still be overvalued.

Dead Canary's picture

If a crash is inevitable (it is) the big players will trigger it. This way they can front run the market. I believe this HAS to happen. But like a tsunami, where the tide quietly goes way out before the tidal wave hits, the banks will drop gold and silver. (so when people start buying, the talking heads can say: "Gold closed unchanged for the day")

When silver hits a $14 dollar handle, I'm backing up the truck.

wise_owl_says...'s picture

i am not selling any of my silver one ounce coins for $14.00, nor $17.00. only a net buyer for deal of century. selling off stupid CIA cryptocrap algos to ultimate greater fools for much more shiny tangible. my truck has been backed up for last 20 years, using tracker trailer now. even blackbeard would blush at such a sight. keep searching for a 'bottom' d.c. ;-)

shuckster's picture

wow boomers always looking for a boogie man. anyone but themselves. can't understand HFT tech so they want to outlaw it. same goes for whip makers. I heard they tried to outlaw eyeglasses at one point because they didn't honor "god's plan for a person"

GUS100CORRINA's picture

Observation: Let's review what has been going on in the USA since the SOLAR ECLIPSE on 21Aug17.

We have had FIRES, DROUGHTS, HURRICANES, FLOODS, PESTILENCE OUTBREAKS and minor EARTHQUAKES. 

I guess FINANCIAL CRASH is next on the list followed by the "BIG ONE" and WAR with RUSSIA.

What a YEAR we are having in the USA!!!!

logicalman's picture

Eclipses used to be bad omens, but now we - at least those with any sense - know that it's just the moon getting between the earth and the sun.

On earth there have alwys been fires, droughts, hurricaines, flood and pestilence outbreaks.

One event being followed by others in not a good way of establishing any connection between them.

I took a shit this morning an now it's started to rain. I doubt there's any connection.

 

Giant Meteor's picture

Yes, but if EVERYONE flushes all at once, could be a problem ..

;)

Implied Violins's picture

"Hey, toad, it's gettin' kinda hot here and my skin is starting to slough off. How about you?"

Frog: "Yeah, mine is too."

Toad: "OK, guess it's normal, then. Thanks."

logicalman's picture

All that I mentioned is normal for the planet.

It's the stuff humanity is up to that is worrying.

The planet will be fine....

George Carlin

https://www.youtube.com/watch?v=7W33HRc1A6c

Cynicles II's picture

FFs have many a guise and go by many names.

Moonchichi's picture

This is what is meant by transparancy, formulate a plan that a 10 yr old could see through.  Blame the hackers!!!111oneone

Gonzogal's picture

They will blame either Russia or Iran!

Blue Steel 309's picture

Interesting that they are more concerned with the stawk market than securing the boarder from the invasion that actually is an existential threat.

Cynicles II's picture

The latter is by design, the prior has not yet been truly designed.

Cynicles II's picture

After using the writtings of The Huxles and Owells as a successful instructional guid they look to do the same with the market(s). Thier problem is, they don't have the instruction booklet; so they are reaching out under the guise of "prevention". Manual to be delivered shortly; it's for the greater good.

GUS100CORRINA's picture

DARPA Asks HFT Traders How Hackers Will Crash The Market

My response: You mean to tell me that there is something that DARPA doesn't know? I am shocked!!!

These guys are always on the leading edge. Interesting.

BennyBoy's picture

 

If DARPA was leading edge they wouldn't need to ask. Or just ask Blankfein.

More Second rate coders.

espirit's picture

I would have told DARPA to go buy the 'How To... Book For Dummies'.

HeySus.

Rapunzal's picture

The parasitic elites control the markets. All crashes happened under the watch of the FED and other central banks. Every crash enriches the elite and bankers even more. DARPA asking HFT of hacking is just pretending being worried.

knukles's picture

For some reason, getting DARPA further involved in the securities business doesn't sound like a good idea.
This has all the markings of a bountifilious clusterfuck that'll become another unfounded "The Russians did it." moment

Debt-Is-Not-Money's picture

No damn wonder they want out weapons!

BennyBoy's picture

 

 "wave of fake sell orders" 

Isnt that spoofing? HFT do that all the time.

auricle's picture

Give Eric Hunsader a call.

pndr4495's picture

DARPA should be talking to The CFR, The Trilateral Commission and The Federal Reserve Bank of NY - not necessarily in that order. I suspect that they already have and that this article was designed to turn attention away from where it should stay focused.

espirit's picture

That's pretty weak, man.

Dude didn't even do a shot count.

Poor forensics.

ebworthen's picture

Ah...now we know how they will justify the next bailout of the banks/corporations/insurers - "Russian hackers".

Of course...us plebeians will still have to pay our mortgage, other bills, and taxes.  "No bailout for you!" (again).

Spectre's picture

So its ok for the HFT guys to manipulate but not anyone else.  What a fucdup world we live in.

Hkan's picture

U.S citizens screwed by T and deep state. Then wasted on battlefield.

Riots a natural reaction....

hooligan2009's picture
DARPA Asks HFT Traders How Hackers Have "Bulled" The Market

There, fixed it for you.

The market should have two way price action. When it doesn't, it is rigged by bad actors (inclduing the Fed).

zvzzt's picture

HFT is no winner with the "bulled market". Volatility is too low, turnover rates (volumes) are lower and most important of all: costs & clearing are very substantially higher. Especially SEC fees (currently $124 per 1 mln traded) are a big cost at these high prices. Chapter 11 on Worldcom and Enron.... Those were the days !

Giant Meteor's picture

Hmmmm,

Channeling again ..

koan's picture

How easy would these attacks have been prior to computerized systems?

Ricki13th's picture

The perfect reason for why the markets will crash. It's the Russians!

 

historian40's picture

DARPA looking for help with details in their script when blaming someone else for the hack they themselves are most likely to carry out?

BiggestLoser's picture

Sounds like someone is building a narrative.

Cutter's picture

Am I the only one who finds it more scary that the Department of Defense is involving itself with something as private and domestic as the stock market, than I do the threat of a foreign country attacking the stock market?  

Their inquiry implies DOD will be defending individuals against hacking and attack. 

I understand the vulnerability of our computer based trading systems to foreign attack, but DOD's sole role should be to respond overseas, through cyber or kinetic.  Defending against the attacks domestically, should solely be executed through domestic regulatory and law enforcement agencies. 

The thought that at time of overseas war, the Secretary of Defense will assume to himself the power to order domestic, private firms to take specific market actions "in defense of the nation" is pretty scary.  

Talk about a slippery slope.   

tedstr's picture

Deep state trump resisters at work

Games Without Frontiers's picture

Quite ironic how they ignore that HFT trading will crash the market without any help.

enough of this's picture

Why doesn't DARPA ask the SEC instead?  The SEC has been turning a blind eye to HFT market manipulation for years.  That's how Wall Street proprietary trading desks are able to execute statistically impossible consecutive winning trading days.

Any grade-school kid can create an algo to front-run honest investors 24/7.  The difference is that the SEC lets the big boys, who contribute to politicians, get away with it.  Anyone else, who isn't connected, would be hooked up and prosecuted in a heartbeat. 

The easiest way to crash the market is for the SEC to ban manipulative high-frequency trading.  Then watch over half the market volume dry up immediately.   HFT traders will immediately close their open positions and pull all their bids, leading to a massive sell-off.  In other words, high-frequency traders have the SEC and the market by the balls.

Falconsixone's picture

Creating a reason.

Nomad Trader's picture

The crash will occur if/when HFTs suddenly stop trading, most likely following a 3 or 4 day run of unusual losses that force them to wind down. In that case, would their absence and subsequent dearth of liquidity be tantamount to them causing the crash? Of course it will. Though a scapegoat will take the blame instead.

Evan Wilson's picture

It is funny that one of the arguments for HFTs is that they increase liquidity; however any time there is a problem, all of the HFT stop and dispear from the markets, and liquidity drys up.