algo-sniffing
pp. Using securities trading software designed to detect other trading programs. Also: algosniffing.
algo-sniff v.
algo-sniffer n.

Example Citations:
No one in the markets contests the legitimacy of electronic market making or statistical arbitrage. Far more controversial are algorithms that effectively prey on other algorithms. Some algorithms, for example, can detect the electronic signature of a big VWAP, a process called ‘algo-sniffing’.
—Donald MacKenzie, “How to Make Money in Microseconds,” London Review of Books, May 19, 2011

But there are two rather more predatory strategies. One is called algo-sniffing. Here, a super-fast computer tries to find other computers going about their everyday business of buying or selling shares, and figures out what they’re going to do and when.

The algo-sniffer can then get ahead of the game and exploit the slower computer. And of course you could have algo-sniffer-sniffers and algo-sniffer-sniffer-sniffers in a high-frequency arms race. No wonder speed can be so important.
—Tim Harford, “High-frequency trading and the $440m mistake,” BBC News Magazine, August 10, 2012

Earliest Citation:
Algo Sniffing: HFTs are actively sniffing the more predictable of algorithms. Pegging, VWAP and Pouncing algos are quickly identified and the HFT then trades ahead of predicted flow.
Doug Clark et al., “The Impact of High Frequency Trading on the Canadian Market” (PDF), BMO Capital Markets, July 22, 2009

Notes:
A high frequency trading (HFT) program is designed to buy and sell securities using a particular algorithm (essentially, the program's trading strategy), so such a program is often called an algo.

Related Words:

Categories: