Depending on how you look at it, this is either a harbinger of the emergent-model AI Singularity or a demonstration of the specious voodoo underpinnings of the automated financial markets… possibly both, if you’re a real pessimist [via Kottke.org].
A couple weeks ago, Huffington Post blogger Dan Mirvish noted a funny trend: when Anne Hathaway was in the news, Warren Buffett’s Berkshire Hathaway’s shares went up. He pointed to six dates going back to 2008 to show the correlation. Mirvish then suggested a mechanism to explain the trend: “automated, robotic trading programming are picking up the same chatter on the Internet about ‘Hathaway’ as the IMDb’s StarMeter, and they’re applying it to the stock market.”
Companies are trying to “correlate everything against everything,” [Bates] explained, and if they find something that they think will work time and again, they’ll try it out. The interesting, thing, though, is that it’s all statistics, removed from the real world. It’s not as if a hedge fund’s computers would spit the trading strategy as a sentence: “When Hathway news increases, buy Berkshire Hathaway.” In fact, traders won’t always know why their algorithms are doing what they’re doing. They just see that it’s found some correlation and it’s betting on Buffett’s company.
Now, generally the correlations are between some statistical indicator and a stock or industry. “Let’s say a new instrument comes to an exchange, you might suddenly notice that that an instrument moves in conjunction with the insurance sector,” Bates posited. But it’s thought that some hedge funds are testing strategies out to mine news and social media datasets for other types of correlations.
Crazy, right? Well, irrational on one level, perhaps, but those trading algos are big (bad) business: remember the guy who was accused of stealing some algo code from Goldman Sachs? Eight year stretch [via BoingBoing].
Via Chairman Bruce, the US government is getting (more) worried about automated trading in the wake of last week’s largely-unexplained and possibly emergent “stock tornado”; insert aphorism about horses and barn doors here, possibly modified to suggest that the farmer has been letting the horse run the stud for years.
Investment bankers are naturally keen to point out all the benefits of automated trading and “dark pools”:
Goldman Sachs Group Inc., the most profitable firm in Wall Street history, has shared memos with lawmakers and SEC officials that say computer-driven trading and an increase in stock transactions that occur off public exchanges has reduced consumer costs and brought more liquidity to markets.
Well, if we can’t trust Goldman Sachs, who can we trust? #scathingsarcasm
Having mentioned the sensitivity of the markets with respect to the UK election results, it makes sense to point out Tim Maly’s recent post about automated trading programs and market movements.
The point is that 60% of stock trades are being done by machines, operating according to a set of algorithms and inputs, which (I’m pretty sure) do not include natural language parsing of the news.
Yet whenever the stock market makes a move, the financial press constructs post hoc narratives that explain what’s happened as a reaction to the news of the day, as if the news is what was was motivating the trades. […]
This fascinates me. Most stock market trading is being done by machines, but the stories we tell ourselves are about humans responding to new information. You can’t interview an algorithm about why it made a certain choice. In the absence of that knowledge, it seems clear that the financial press just makes educated guesses and acts as if correlation is causation. It’s speculative fiction.
In what appears to be a very contemporary story of industrial espionage, we discover that 32MB of computer code could be the key to the success of one of the most powerful financial organisations on the face of the planet – and that someone may well have copied and uploaded it for purposes unknown. [via SlashDot]
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.
This is somewhat of a double bind for Goldman Sachs, as prosecuting the alleged theft will require them to reveal a certain amount of their business secrets at a time when people aren’t best disposed toward Wall Street profiteering. It also sheds a less than flattering light on the FBI’s investigative priorities:
What is probably most notable, in less than a month since Sergey’s departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases… especially those that allegedly involve Goldman Sachs.
I think this is going to be one of those stories that will grow with the telling, and Goldman Sachs are going to come out looking bad whether they win or lose the case. Couldn’t happen to a nicer bunch of people, AMIRITE?