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.

"Just goes to show you how just one person can have such an outsized impact on the market," said Eric Hunsader, head of Nanex and the No. 1 detector of trading anomalies watching Wall Street today. "Exchanges are just not monitoring it."

Hunsader's sonar picked up that this was a single high-frequency trader after seeing the program's pattern (200 fake quotes, then 400, then 1,000) repeated over and over. Also, it was being routed from the same place, the Nasdaq

"My guess is that the algo was testing the market, as high-frequency frequently does," says Jon Najarian, co-founder of TradeMonster.com. "As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency."

Translation: The ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity.

David Fuller's view It does not require much imagination to appreciate that unfettered high-frequency trading (HFT) is going to end badly. It started as a war of the algorithms against traditional (human) investing and trading. In this all too real version of fictional Skynet, the machines are not only faster, but they increasingly use their speed of order placement in a predatory, front-running manner, as has often been discussed on this site.

The traditional investors and traders have been in retreat for several years. Increasingly, it is machine against machine in this war raging across our financial exchanges. Following the progression of HFT, how long will be before this turns into a cyber war where hostile entities are not just trying to game the system but to cause financial mayhem?

Given the risks and since HFT currently depends on the placing of high-speed computers within exchanges, 'Why is this allowed?' an innocent bystander might ask. It could only happen, and I choose my words carefully, because most of the exchange officials are greedy and naive. An increasing number of financial exchanges across the globe, in search of short-term revenue, are actually wooing HFT Trojan horses and inviting them into their premises!

The predictable consequences are an increasing number of flash crashes, frequent spasms of intraday volatility, a decline in actual, tradable volatility and the correlation banality known as 'risk-on' and 'risk-off'. This increases market volatility and reduces performance for most traditional investors, large and small.

'Where are the honest regulators?' you might ask. Way behind the curve of HFT events because they are outgunned financially, outnumbered and mostly underskilled.

Fortunately, an increasing number of investors are outraged over HFT excesses, as you may know from Fullermoney's prior coverage and will also see from the 'Comments' section beneath the CNBC article above. Here is one proposed solution:

"Want to stop high frequency trading? TAX IT!!

"Any purchase then sale within 1 second, tax at 99.9999999999% of the profit. Have a loss, tough, no netting out the loss against gains.

"10 second trades? 99.999999% tax treatment same as above.

"Keep adjusting the frequency, and corresponding tax, until you hit the point that the problem goes away.

"Oh, and leave that crappy argument about "liquidity" on the table, since we seemed to do ok before the programmers took over."

In this instance, I agree, although I fear this could be another Trojan horse. Have you ever seen or heard of a socialist politician who did not want to introduce all manner of financial transaction taxes? Neither have I.

For more on the dangers of HFT, read: Cuban, Cooperman: Curb High-Frequency Trading, also from CNBC. Here is a brief sample:


On "Fast Money," Cooperman blamed high-frequency trading for driving the public out of the stock market and raising the cost of capital to business.

"How many incidences does the SEC have to see? Flash crash, Knight securities, the BATS exchange couldn't open their own offering, Facebook," he said. "Seventy percent of daily trading volume has nothing to do with fundamental research. It's high-frequency trading and the slicing and dicing of ETFs."

Cooperman suggested reinstating the 1938 uptick rule, which banned the short-selling of securities other than in an uptick.

"It served the market well for 70-odd years," he said.

Fullermoney has long called for the reinstatement of the Uptick Rule, although this would only represent a small obstacle for HFT.