Tag Archives: finance

The Flash Crash and the trouble with transparency

A report at Ars Technica compares the computerised financial markets to a vast and infernally complex piece of multi-threaded software running on hardware that was never designed to cope with it (or vice versa), before telling us what I suspect most of us have already guessed: it’s a gigantic house of electronic cards. But ironically enough, part of the problem stems from the very transparency that the shift to electronic trading was supposed to bring with it:

Unlike the market of an earlier era, where humans executed trades by talking to (and shouting at) one another, the electronic communication networks (ECNs) that emerged in the late 70s logged every detail of every trade for later auditing. No more “he said, she said” when resolving a dispute or ferreting out fraud—just go to the tape. But then came the flood.

After a solid decade of moving almost all trading activity onto electronic systems (the NYSE floor is just there for show at this point), the market generates so much data that it’s nearly impossible for a mere governmental agency like the SEC to analyze. There are literally tens of thousands of quotes per second in hundreds of thousands of symbols across multiple electronic exchanges—the SEC would need the brain and computer power of the NSA to even begin to do a credible job of crunching this many numbers for a credible post mortem.

[…]

The amount of data isn’t just a problem for regulators. Much of the report details how the systems of the market participants were themselves overwhelmed in real-time with the sudden surge of digital information. Processing began to slow, queues filled, backlogs developed, and machines were eventually pulled offline as the humans intervened and tried to sort out possible data integrity issues.

Beyond the challenges of reconstructing events, the traders also use some subset of the data firehose that the market’s machines throw off today as input to train the algorithms that will run the market tomorrow. So at some point, we’ll wake up and realize that it’s really turtles machines all the way down. Put that in your bong and smoke it, Keanu.

Ouch. And it gets worse, too; go read the whole thing. I think the best way to sum it up in layman’s terms is that we’ve turned the financial markets into something a little like one of those “game of life” software ecosystems… which would be quite a fascinating idea if it weren’t for the fact that unexpected interactions within that ecosystem can affect meatspace in a pretty serious way.

The more I learn about derivatives and futures and all that “clever” quant stuff, the more I think it’s a bunch of hubristic mathematical voodoo bullshit that we’d do well to get shot of sooner rather than later; the only people it really seems to benefit are the wankers who thought it all up in the first place.

MBA, RIP?

This week’s Zeitgeist was brought to you by… growing mistrust of the American higher education system, and of higher education in general! First of all, the business world wakes up from the hangover of the economic collapse and starts wondering whether the ubiquitous business degree was a root cause of the indulgences of the night before [via Bruce Sterling].

The truth is that the relevance of the technical training allegedly offered by the MBA was always overblown. The idea that there is some body of knowledge pertaining to business management that can be packaged up and distributed to the business universe in two-year course-lets—well, it sounded good about a century ago, when it was first conceived. Maybe it still had merit when the schools were turning out only a few thousand graduates per year. But it certainly stopped making sense well before the schools achieved their current level of production of a whopping 140,000 or so graduates per year. The empirical evidence on the contribution of the MBA to individual career performance seems to bear this out—mainly because it doesn’t exist. In fact, if the relevance of an M.D. to the performance of doctors were even half as unsubstantiated, we’d probably be fantasizing about tossing a few physicians in jail, too.

The other truth helpfully revealed in the throes of the crisis is that ethics and integrity and social responsibility aren’t just optional extras for good business management—unless by “management,” you mean “looting.” Managers don’t need to be trained; they need to be educated—in the sense of “civilized.” Unfortunately, a business degree isn’t just irrelevant to that purpose; it’s positively detrimental.

Next, The Economist wonders why vocational education is still so frowned upon, even though it would be demonstrably more useful than college degrees [via TechnOccult]:

America has a unique disdain for vocational education. It has supported such training since 1917; money now comes from the Perkins Act, which is reauthorised every six years. However, many Americans hate the idea of schoolchildren setting out on career paths—such predetermination, they think, threatens the ethos of opportunity. As wages have risen for those with college degrees, scepticism of CTE has grown too. By 2005 only one-fifth of high-school students specialised in an industry, compared with one-third in 1982. The share of 17-year-olds aspiring to four-year college, meanwhile, reached 69% in 2003, double the level of 1981. But the fact remains that not every student will graduate from university. This may make politicians uncomfortable, but it is not catastrophic. The Council of Economic Advisers projects faster-growing demand for those with a two-year technical-college degree, or specific training, than for those with a full university degree.

Meanwhile, down in Chennai (formerly known as Madras), the (degree-carrying) head honcho of Zoho (a software-as-service outfit) explains why he makes a point of not hiring programmers with degrees [via SlashDot]:

We started to ask “What if the college degree itself is not really that useful? What if we took kids after high school, train them ourselves?” I talked to a lot of people internally, and one of our product managers introduced me to his uncle, a college professor, who he thought might be interested in hearing me out. As I shared our observations on recruiting, he shared his own experience in over twenty years teaching Mathematics and later Computer Science. It turned out we shared a common passion. He joined us within a month to start our “AdventNet University” as we very imaginatively called it. This was in 2005. He went to schools around Chennai to recruit students. So as not to distract anyone from their existing plans, we waited till the school year ended, went to several schools to ask for bright students who were definitely not going to college for whatever reason (usually economic). We then called on those students and their parents, and explained our plan. We started with an initial batch of six students in 2005, who were in the age range 17 or 18.

That proved to be an outstanding success. Within 2 years, those students would become full time employees, their work performance indistinguishable from their college-educated peers. We have since expanded the program, with the latest batch of students consisting of about 20, recruited not just from Chennai but smaller towns and villages in the region.

And finally, the quasi-legal funding schemes of derugulated Russian universities could be taken to represent an expression of “spontaneous capitalist neoconservatism” – one that other European institutions are keen to copy, even though the evidence shows that an increase in private funding actually leads to a decline in educational quality:

Public universities of the continental Europe (France, Germany) have 8-10 per cent of their budgets coming from non-public sources.[1] Certain UK universities, which are often used as a didactic model by advocates of reform, receive up to 28 per cent of their budget from endowments, tuition fees and other publicly independent sources. Russian universities do not provide the public with statistics of this kind, with excuses such as calculation difficulties or appealing to the principle “it depends on what is taken into account”. Nevertheless, in private discussions administrators of several large public universities and departments indicate a proportion of “around 50 per cent” from private sources, which corresponds quite well with expert estimations of 45-55 per cent given in the early 2000s. Even if university managers always love to get more from the public budget, last year’s State programs and State institutional grants, unknown in the Nineties and even in the first half of the current decade, may result in some indigestion syndrome among university structures.

I’m not sure that mistrusting the value of a diploma is a new thing – my father used to joke about how one should “hire a fresh graduate, while they still think they know everything” – but these questions sure fit in neatly with the current trend for wondering where we went wrong, and whether we might be able to avoid doing it again. Whether we’ll actually make the changes we need to (or even recognise them) remains to be seen, natch.

Econopocalypse scenario #3654: the Fat-finger Collapse

Ars Technica has an interesting article about a couple of recent stock-market glitches caused by high-frequency trading algorithms run amok. Long story short: a screw-up at Credit Suisse was caused by “a trader who accidentally double-clicked an icon in a trading program’s interface, when he should’ve single-clicked.Yipes.

OK, so it’s not quite the same as a tired technician leaning on the nuclear launch button by accident, but given the utter dependence we have on the instruments of high-speed high finance, similar mistakes could cause global catastrophes. [image by Coffee Maker]

The problem is connected to so-called “day-traders”, computer-assisted stock deals that occur in the blink of an eye, often without much human interaction, and minor errors are amplified at the speed of light (or at least the speed of data in optical fibers) by the networks, causing fluxes that folk like you and I never notice, but which cost bankers and investors thousands of dollars in losses and fines…

Of course, the fact that such computer-driven volatility hurts day traders matters little to long-term investors. But the fear is that these glitches are fleeting indications that the system as a whole is vulnerable and unstable, and that the right combination of circumstances could cause what happend to RMBS to happen on a wider scale. This is especially true as even more of the trading activity, even among individual traders, shifts to automated platforms.

However, it’s not all doom and gloom; the last few years have seen a sharp increase in small trading firms of the two-guys-and-a-fast-computer type, small independent operators using the same techniques as the big banks to trade automatically through the blind of commercially-available trading software.

The Obama administration’s efforts to rein in high-frequency trading by eliminating flash orders and banning proprietary trading (much of which is HFT-based) from large banks will probably have the effect of leveling the playing field a bit for these smaller algo shops. As Matthew Goldstein at points out in his Reuters article on the topic, the prop desks may disappear, but the software and expertise will not. Instead of being concentrated at a few large banks, algo trading will just spread, as the talent behind it either jumps to new funds or goes solo.

Once again, the network corrodes hegemony… but whether a world where anyone and his dog can engage in automated high-frequency wheeler-dealing will be a safer, better and richer one remains to be seen.

‘Mirror of emotions’ to ‘rationalize’ online traders

rationalizer_highres3“Curb your enthusiasm” seems to be the message of a new gadget from Philips Electronics and the Dutch bank ABN AMRO. They decided to collaborate on the “Rationalizer” bracelet system “after research confirmed that day traders sometimes act irrationally because their actions are affected by their stress level and powerful emotions such as greed or .”

The Rationalizer consists of an “EmoBracelet” and an “EmoBowl” and incorporates sensors and signal processors designed by Philips. The EmoBracelet’s galvanic skin response sensor measures the level of emotional arousal in a similar way to a lie detector. The result is displayed on either the bracelet or the EmoBowl as a light display that intensifies and changes to reflect the wearer’s intensifying emotional arousal. At the highest emotional the display has a greater number of elements moving at higher speed, and the color changes to a warning red.

The video is pretty entertaining. Yes, it does look like a phildickian update of the old mood ring. And it’s not just for day traders willing to admit that they sometimes get carried away.

Senior Director at Philips Design Clive van Heerden said sensing was becoming more important in today’s digital world. He also believes there are many other possible applications, such as game controllers, intelligent cameras to interpret social situations, or even dating sites that enable you to tell who is attracted to you.

Also, you have to love the name of the division of the bank that worked on this device: the Dialogues Incubator.

[Story and image: PhysOrg.com]

Games and economic misbehaviour

wolfram_fractalsGeorge Dyson has an excellent and compelling essay on game theory, economics, information theory, computer science, banking, finance, technology, and John von Neumann:

We are surrounded by codes (some Turing-universal) that make copies of themselves, and by physical machines that spawn virtual machines that in turn spawn demand for more physical machines. Some digital sequences code for spreadsheets, some code for music, some code for operating systems, some code for sprawling, metazoan search engines, some code for proteins, some code for the gears used in numerically-controlled gear-cutting machines, and, increasingly, some code for DNA belonging to individuals who serve as custodians and creators of more code. “It is easier to write a new code than to understand an old one,” von Neumann warned.

The monograph over on Edge discusses von Neumann’s intellectual antecendants and the development of game theory and statistical modelling. It also includes some interesting commentary on our recent economic difficulties. Definitely worth a read.

[image from kevindooley on flickr]