I am suspending my “do not link to The Atlantic” policy to bring you this fascinating article — Market Data Firm Spots the Tracks of Bizarre Robot Traders, Alexis Madrigal’s discussion of something that starts out strange, and then gets even weirder:

The trading bots visualized in the stock charts in this story aren’t doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there’s no way they’d ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

In fact, it’s hard to figure out exactly what they’re up to or gauge their impact. Are they doing something illicit? If so, what? Or do the patterns emerge spontaneously, a kind of mechanical accident? If so, why? No matter what the answers to these questions turn out to be, we’re witnessing a market phenomenon that is not easily explained. And it’s really bizarre.

It’s thanks to Nanex, the data services firm, that we know what their handiwork looks like at all. In the aftermath of the May 6 “flash crash,” which saw the Dow plunge nearly 1,000 points in just a few minutes, the company spent weeks digging into their market recordings, replaying the day’s trades and trying to understand what happened. Most stock charts show, at best, detail down to the one-minute scale, but Nanex’s data shows much finer slices of time. The company’s software engineer Jeffrey Donovan stared and stared at the data. He began to think that he could see odd patterns emerge from the numbers. He had a hunch that if he plotted the action around a stock sequentially at the millisecond range, he’d find something. When he tried it, he was blown away by the pattern. He called it “The Knife.”

As they say, read the whole thing. And by “the whole thing,” I mean the comments too — uncharacteristically, the comments are a joy to read. There’s lots of reasonably intelligent speculation about what this might mean, informed discussion about whether this really does constitute emergent behavior (probably not, but it’s fun to think about anyway), and Conway’s Game of Life makes a cameo appearance. You can also find a fabulous comment that you’ll likely read twice before you realize the poster is full of baloney (you’ll know when you get there), but might represent a future that is incrementally closer to The Singularity. For fairly obvious reasons, it feels like there’s enough raw material here to build a really interesting SF story (and Robert Charles Wilson’s “Blind Lake” came immediately to mind.)

For me, the science-fictiony aspects of the algorithms’ behavior isn’t the really interesting part. Pulling the curtain back on high-frequency trading and low latency trading, and the ridiculous levels of automation in the stock market was the fascinating bit. We could almost call it “extreme trading” — a world where microseconds (!) matter, and where network latency and the speed of light can be all the difference. (Students of organizational theory will quickly realize that this kind of tight coupling and the intolerance to failure can have serious consequences. Nobody’s going to die, exactly, but do we really want tightly coupled, fault-intolerant, automated systems driving our financial markets? Do we get a choice in the matter?)

Reading far enough into the comments on Madrigal’s post eventually leads to this post at The Market Ticker about high-frequency trading, which will probably not make you feel very good about the people behind HFT. I don’t know whether Karl Denninger is right on this subject or not (he was sufficiently nutty in his former life that I might be inclined to take what he has to say with a big bag of road salt), but his arguments are persuasive, and if he’s right we’ve got another big structural problem on our hands. Poke around a bit in his archives, and this is a recurring theme for him:

But when the secondary markets become the plaything of computers trying to game each other with “Wargames-style” bid and offer manipulation (an unlawful activity), when the public good of price discovery becomes subsumed by millisecond-level computer activity designed and intended to skim off portions of the order flow by distorting that price-discovery mechanism, and when rampant insider-trading and other fraudulent activity gets to the point of being “in your face” and yet is ignored by the authorities that have allegedly made these acts unlawful, then the individual investor, who both has no access to these “technologies of theft” and in addition believes in the rule of law (and lacks the protection of having the employees of the government charged with enforcement all coming from their companies!) have no reason to continue “invest” in what they have (correctly) deduced is a rigged casino.

“Would you like to play a game of Global Stock Market Manipulation?” It’s worrying stuff.