How Cyber Attacks Affect Trading

cyber attacks
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As the B2B News Network pointed out in a January news article, cyber attacks have been on the rise over the past couple of years, and they pose a dangerous threat to businesses and individuals alike.

In this article, we are going to take a look at the impact that such attacks may have in the future on financial markets and stock trading.

Are We Vulnerable?

According to a report by Marketwatch from July of 2015, multiple stock exchanges surveyed in 2012 by The International Organization of Securities Commissions and the World Federation of Exchanges reported that they had undergone a cyber warfare scenario.

Furthermore, almost 8 out of 10 brokerages report having faced an attack, and 7 out of 10 US-based advisers similarly report that they, too, have faced some sort of an attack. In other words, the entire financial industry, from banks to brokerages to exchanges, are at constant, imminent risk of attacks via cyber channels.

As a result, these threats must be taken seriously. The financial industry is tightly interwoven, and a potential attack could decimate many stakeholders who have claims in various financial transactions at any given moment. At particular risk, proprietary traders and trading systems may face heightened risk.

What Does Cyber Warfare Usually Look Like?

According to an article by Reuters, the large majority of cyber attacks that take place are known as DDoS attacks, or “distributed denial of service” attacks.

These attacks work by forcing a server to reject real network traffic by flooding the server with massive amounts of fake traffic, more commonly known as “bot traffic”. As the server attempts to process all the requests for access by outside sources, real individuals seeking to use the server cannot access its materials.

Most commonly, hackers will attempt to overtake random devices that have access to the internet and are currently inactive. Then, they require those devices to send constant signals to the server that is being attacked to request access to the server. These traffic streams overload the server in question, which will often cause that server to crash temporarily.

These sorts of attacks can be carried out using any internet-connected device with an IP address. This means that hackers can use anything from a smart TV to an old flip phone or internet-connected microwave to help out in a DDoS attack assuming they can gain control of that device.

How Could These Attacks Affect Financial Trading?

Stock traders–individuals who make short-term stock trades on a frequent basis–depend on the efficiency and liquidity that markets provide. Furthermore, they require that the brokerage that services their trades execute those trades in milliseconds to maximize profits.

The technical and fundamental proprietary trading models that stock traders use rely on real-time data to be extremely accurate. In fact, a trader’s Forex trading platform has been built on algorithms that execute trades for him when certain data points hit certain upper or lower limits that the trader sets in real-time.

With that said, here are two of the main ways that a trader could be severely impacted by cyber warfare:

1. Transactions Lost in Transit
In every exchange across the world, stock trades are executed in milliseconds. The money is taken out of a trader’s account, the stock is purchased, and then the trader receives the stock in his account.

If an attack were to take place in the split second that a trade takes place, the brokerage could lose the trader’s funds without ever delivering the assets or having recourse to show that the trader ever bought the asset. In this extremely rare phenomena, the buyer would lose funds and have no recourse except for a long legal process.

2. Bid-Ask Spread and Highly Volatile Assets
Free markets depend on efficiency. As buyers and sellers perform their functions constantly, true market price of an asset is discovered. If one portion of the market was taken out by a cyber attack, it could result in higher or lower bid-ask spreads, which would result in higher or lower asset prices.

If a trader is selling a stock and the price dropped instantly when he sold due to this issue, he stands to lose big. Similarly, if the price rises rapidly and the trader placed a market order, he could be in a horrible position.

What Does it Mean?

Taking all of this information into account, it is important to remember that there are many other ways that markets and traders could be impacted by cyber attacks. So, it is the responsibility of the trader to know what recourse he can take in the event of an attack, and it is the job of market exchanges and brokerages to constantly upgrade their defense technology to prevent such attacks preemptively.

 

Feature image source: depositphotos.com

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Ethan Featherly
Ethan Featherly has a background in economics and trading. After he graduated from The University of Chicago he decided to become a financial analyst. Ethan is now a content manager at Admiral Markets, where he is in charge of the educational section.
Ethan Featherly

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