Flash Boys or How To Crash The Stock Market

FCC license number 1215095...

The mystery that concludes Michael Lewis' book Flash Boys is a tempting and intriguing invitation into a whole new level of corruption.  I'll leave that to others.

Flash Boys provides the information needed to crash the stock market on demand.  And if I can figure it out, so can others.  Hopefully, sunlight will be a disinfectant.

There would have to be several simultaneous points of attack, physically and virtually.

There are three main aspects of the High Frequency Trading system that can be impacted easily from the outside:

  • The fiber optic cables,
  • The microwave communication towers,
  • The data entered to buy stocks.

Since the microwave communication towers are essential to warn the High Frequency Trading software to stop trading when there is a sudden drop in stock prices, that is the most important system to target.  Fortunately, that is easy.  Just disrupt one of the communication towers.  The entire system is a series circuit, like cheap Christmas tree lights.  If the connection at any point in the line is disrupted, all of the lights will go out. 

It doesn't have to be anything big or showy.  The only item to destroy would be the repeater of the signal.  Voila.  The entire system is disrupted.  The purpose of this is disallow High Frequency Traders from insulating themselves from risk.  As Flash Boys explains, a sudden dip in stock prices is signaled through the microwave communication system, and it warns High Frequency Traders so they can get their stocks sold before the rest of the market knows of the crash.

The fiber optic cables are another point of vulnerability in the High Frequency Trading model.  The High Frequency Trading is conducted using these cables, which are buried next to rural highways and other public right-of-way spaces.  Yes, it would be easy to break or cut one of the cables.  But it would be discovered quickly and repaired within a day.  Not to say it wouldn't cause grief to High Frequency Traders, but not real pain.  And breaking a cable would only highlight an intent to attack the system overall. 

The remaining part of system described in Flash Boys is gathering trading data.  When buying stocks, acceptable prices are entered into the computer.  Before a purchase is made, before even finishing the offer to buy, before clicking the onscreen button to start an offer to buy, the prices you find acceptable are given to High Frequency Traders.  They use that knowledge to buy what you want ahead of you and sell it to you at the high end of your acceptable price range.  The entire High Frequency Trading business model is based on speed, and knowing their systems can move data more quickly than yours.

This last part of the High Frequency Trading business model holds its greatest weakness.  They gather data based on what has been typed in to a stock trading system before the offer to buy or sell is even posted. 

A group of about fifteen people will be able to log on to stock trading systems and enter information leading the High Frequency Trading algorithms to sell off.  Each person should be able to log on to at least three computers under different names and appearing to be from other locations.

The trades need to be coordinated to happen withing a two minute time frame.  At the same time, the microwave communication system needs to be disrupted, for reasons described above.

My background, among other things, is as a systems tester.  All kinds of testing: black box, glass box, end-to-end, load and stress, user acceptance, automated.

Hopefully, someone will read this post and decide that our financial markets are too vulnerable to outside attack.  At least do a test on it.  All right?

No comments: