Machine Learning Algorithm

Trading Algorithms: Fast and Cost Effective but Extremely Vulnerable

  August 09, 2016 | Algorithms, Hacking, Vulnerability, Malicious Insiders,  Artificial Intelligence

Trading algorithms or “algos”, the highly advanced, automated, but complex tools, allow modern-day asset managers, individual traders to find highly lucrative trading opportunities by making ‘sell’ or ‘buy’ decisions at a lightning speed under different market scenarios. It also made human intermediaries redundant. Transaction costs are down to nearly nothing.  

But as is the case with any modern technology, trading algos also come with a share of risks and vulnerabilities. Few years back, the “flash crash” in the U.S. brought all trading exchanges-- S&P 500, NASDAQ, and the Dow Jones, to a standstill. A poorly executed computerized ‘sell’ order by a prominent US asset management firm in 2010 triggered panic selling across the board, wiping out $1 trillion within few minutes.

Two years later, a high-frequency trading firm, Knight Capital, went bust after a very bad automated trading decision cost the fund $440 million. The company was later acquired by Getco LLC, forming a new firm, KCG Holdings.

Automated trading models also remain extremely vulnerable to hacking. Indeed, several cases where malefactors tried to gain access to secret trading algorithms surfaced lately. Hackers target trading algorithms to extort trading firms. By stealing algos, hackers could demand ransom from traders.

Although traders make sure that risk-control management solutions prevent any untoward incidents such threats can’t be completely ruled out. After all, automated or artificial intelligence, is akin to human intelligence, which could make errors in making decisions.  Likewise, secret trading model, which is like a highly sensitive database, remains vulnerable to hacking from both malicious insiders and outsiders. 


ARCON is a leading enterprise risk control solutions provider, specializing in risk-predictive technologies. ARCON | User Behavior Analytics enables to monitor end-user activities in real time. ARCON | Privileged Access Management reinforces access control and mitigates data breach threats. ARCON | Secure Compliance Management is a vulnerability assessment tool.

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