The Pentagon?! But no one’s worried when stocks get manipulated higher.
It’s funny, the all-out government effort to prevent a major decline of the stock market, or of individual stocks, via manipulation or hacking. Now even the Pentagon is looking into it.
What’s funny is that everyone cheers when manipulation, hacking, and other shenanigans cause the market or individual stocks to soar. It’s just declines they’re worried about at these precarious levels.
Manipulating stocks higher is a time-honored game that routinely receives kudos from all around. The Fed printed nearly $4 trillion and cut rates to zero for eight years – no matter what the damage to the real economy – for the sole purpose of manipulating up asset prices including stock prices. “Wealth effect,” Ben Bernanke called it. Corporate executives and analysts exaggerate future earnings only to deflate them at the last minute, because stock prices are “forward looking” and fake future earnings is all that matters, even if reality now sucks. And on and on. Whatever it takes to push stock prices up, by hook or crook, is cool. These are our heroes.
But when some lonely dude might hack into high-speed stock trading systems or spook the trading algos, quant-fund managers, and high-speed traders and throw algorithmic trading off track to where prices might actually fall in a major way, all heck breaks loose, and the Pentagon feels empowered to step in.
Trading by automated systems, such as used by quant funds and high-speed traders, is beginning to dominate stock trading. The risk of hacking into those systems or manipulating those systems in other ways is a real issue – but it should cut both ways. And the systems themselves are designed to manipulate prices, so….
Nevertheless, the Pentagon’s research arm, the Defense Advanced Research Projects Agency (Darpa), is working with “dozens” of high-speed traders, quant-fund managers, “people from exchanges and other financial companies,” executives, and “others” from Wall Street to figure out how hackers “could unleash chaos in the US financial system.”
This is what the Wall Street Journal reported, citing “participants in the discussions” and a confirmation by Darpa. While not previously reported, the project is unclassified. But Darpa declined to release a list of its participants.
“We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets,” Wade Shen, a Darpa program manager since 2014, told The Journal. In his prior job, he’d researched artificial intelligence at MIT.
This early-stage pilot project, aimed at identifying market vulnerabilities, has been going on for 18 months. Here are a few of the “dozens” of people who’ve worked with Darpa on the so-called Financial Markets Vulnerabilities Project:
- Jamil Nazarali, senior adviser to the CEO of Citadel Securities, “a trading giant responsible for around 20% of daily volume in US stock markets.”
- Misha Malyshev, CEO of trading firm Teza Technologies.
- Manoj Narang, CEO of quant hedge fund Mana Partners.
In these meetings, participants “brainstorm about how hackers might try to bring down US markets, then rank the ideas by feasibility.” The scenarios include:
Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash.
Or hackers could publish “‘fake news’ to shake investor confidence.”
Narang told The Journal that he’d thought the stock market was resilient and would quickly bounce back from a hack, but since his discussions with Darpa, he grew more concerned:
One scenario he fears: a hack of a US exchange in which the attacker sends a wave of fake sell orders to every firm offering to buy shares. That could potentially erase hundreds of billions of dollars of market value as prices drop and firms try to cover losses by selling on other exchanges, Mr. Narang said.
However this will turn out and whatever will come of it, if anything, what’s fascinating is that the Pentagon is worried about malicious actors causing a decline in stock prices. It’s not at all worried about malicious actors causing a surge in stock prices. A surge in stock prices, no matter who or what causes it, is good. By extrapolation, the Pentagon is not really worried about malicious actors per se. It’s only worried about those on the wrong side of the “wealth effect.” And what makes this funny, if it weren’t so serious, is that it’s the Pentagon, of all places, that’s doing this.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.