One of the debates among those who look at the risks of global economic warfare and the research I prepared has to do with whether or not it is possible to manipulate free markets. For those who have studied the current state of Wall Street, the debate is over. High-frequency trading accounts for about 70% of all trading activity.Computer-driven algorithms are calling the shots. Anyone who understands this, therefore, understands that computer networks can be manipulated. In fact, cyber-warfare is one of the greatest security risks of the 21st Century. Computer attacks could shut down the power grid, create defense vulnerabilities, and yes, crash the stock market.
Here are some interesting facts:
- Computer-trading algorithms can be stolen. In fact, they have been stolen at high-profile firms like Goldman Sachs. Even though the perps were caught in that case does not mean that thefts were unsuccessful at other firms. Once a thief has the code, they can use it to manipulate a firm's trading activity without anyone knowing what is happening. According to the SEC investigation, the May 6, 2010 "flash crash," when the Dow lost nearly 10% in a matter of minutes, was triggered by algorithm activity at a firm in the Midwest. Were there codes stolen? We can't be certain.
- We have proof that fake Cisco routers have been sold to U.S. firms through otherwise legitimate U.S. supply chains. There was an active FBI investigation that uncovered the fakes which were made in China to look like genuine Cisco. It is a simple thing to insert mechanisms into these routers that would create openings for manipulation.
- Even without access to algorithms or trading codes, it may be possible to manipulate markets dependent on high-frequency trading. That's the conclusion of MIT researchers as reported in a January 6, 2011 article in InfoWorld by Bill Snyder titled, Hackers find new way to cheat on Wall Street — to everyone's peril (http://www.infoworld.com/print/147699
"High-frequency trading networks, which complete stock market transactions in microseconds, are vulnerable to manipulation by hackers who can inject tiny amounts of latency into them. By doing so, they can subtly change the course of trading and pocket profits of millions of dollars in just a few seconds, says Rony Kay, a former IBM research fellow and founder of cPacket Networks, a Silicon Valley firm that develops chips and technologies for network monitoring and traffic analysis.
Kay, an Israeli-born computer scientist and one-time Intel engineering manager, says the root of the problem is the increasing speed of networks; as they get faster and faster, our ability to actually understand events taking place within them isn't keeping up. Network monitoring technology can detect perturbations in network traffic happening in milliseconds, but when changes occur in microseconds, they're not visible, he says."
In other words, we simply can't monitor the transactions due to the speed at which they are taking place. That opens to possibility of all kinds of nefarious manipulation that we may never detect.
BOTTOM LINE: There is more than one way to manipulate our financial markets. That is beyond debate. Now, are we sure our enemies are unaware? We have proof that both radical Jihadists and the Chinese PLA have the awareness, capability, and likely the desire.
All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved