http://www.businessweek.com/magazine/co ... _mz020.htm
... interesting stuff.
A "benchmarking" algorithm is used by traders attempting to mimic an index's return. An algorithm designed to discover which markets are most volatile or unstable is called "Snif-fer".
Any type of algo trading which depends on the programming skills of other algo traders is called gaming. Dark pools are alternative electronic stock exchanges where trading takes place anonymously, with most orders hidden or "iceburged."[9] Gamers or "sharks" sniff out large orders by "pinging" small market orders to buy and sell. When several small orders are filled the sharks may have discovered the presence of a large iceburged order. They then front run the order.
"They look for big, dumb elephants leaving big footprints," said Joe Saluzzi, head of equity trading at Themis Trading.... "If you're getting tapped by odd lots, if it happens 40 times...you're being gamed." [9]
Any sort of pattern recognition or predictive model can be used to initiate algo trading. Neural networks and genetic programming have been used to create these models.
“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”[10]
But as with all Wall Street feeding frenzies, there are dangers. Some critics say that when less experienced hedge- or mutual-fund traders use the software they've bought from Wall Street, they inadvertently expose their trades. How? Canny traders, mainly those who trade on behalf of big banks and brokerages with the firms' capital, may be able to identify patterns of algorithms as they get executed. "Algorithms can be very predictable," says Steve Brain, head of algorithmic trading at Instinet (INGP ), the New York City-based institutional broker.
Coupling that with a few phone calls to chat about order flows and some traders may be able to piece together enough information to "front-run," or profit by trading ahead of the customer. "There are people out there who seek to reverse-engineer algorithms," says J. Mark Enriquez, chairman of Pulse Trading Inc., which operates an aggregation service that can tap into all available ECNs and alternative exchanges. "The larger firms will swear on a stack of Bibles that there is no info leakage...[but] given the history on Wall Street, there is a potential for someone to figure out how to access" details about algorithmic trades. The chief executive of a leading alternative exchange, who spoke on the condition of anonymity, says: "These tools are in effect a Trojan horse."