Futurismic

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.

Boy, those stock market trader guys sure can get the rest of us into a mess with their crazy high-jinks. But it’s not entirely their fault, you know – they just get a bit carried away in the heat of the moment. C’mon, we’ve all been there – emotions run high, you have to make a snap decision, and sometimes you get it wrong. Granted, for most of us there’s little chance of shafting the entire planet in the process…

But wouldn’t it be good if we could keep those traders calm? If we could lay a metaphorical cool hand of reason on their shoulders every once in a while and say “hey, maybe you’re thinking with your heart (or your dick) rather than your head”? Electronics giant Philips and financial behemoth ABN Ambro seem to think it’s a great idea, and have hence teamed up to develop a conceptual device called the EmoBracelet, which should achieve the same effect:

The gadget [...]measures electrical signals from users’ skin to assess their emotional state. The technology is similar to a lie detector recognising the nervousness behind a fib.

The announcement by the two companies said online traders had nearly double the number of deals as those who traded through a broker and that online traders earned lower returns because of poor decisions.

”Driven by fear, they may sell too hastily when share prices drop. Driven by greed, they may be overenthusiastic,” the announcement said.

The EmoBracelet and another device, an EmoBowl, use electrical displays to show a person’s emotional intensity. The two items were designed to warn traders to step back and take a breather by alerting them to their heightened emotional state.

As a wearer’s emotions grow more intense, lights flicker faster on the bracelet and the colours inside the bowl change from a soft yellow to orange to a deep cautionary red.

Nice idea, guys, but I have to say that I’m not sure the EmoBracelet is going to prevent traders doing dumb things. After all, most of the folk I’ve worked with who were prone to agitation or emotional overinvolvement with their work would react rather badly to having their “heightened mental state” pointed out… and some of them would probably carry on pushing the envelope just to prove how on top of things they really were (in their minds, at least).

A version of the EmoBracelet that injected the trader with a hugely powerful soporific at the pertinent moment might be a little more useful, however… [story via Technovelgy; image by McWilliams Graphics]

Remember that story we ran a few weeks back about the alleged theft of the Goldman-Sachs automated trading code?

Well, thanks to said case, Goldman-Sachs and the high-frequency automatic trading (HFT) practices that they dominate are increasingly sliding into the spotlight of Congressional scrutiny, so Ars Technica have knocked up a brief guide to what it’s all about. If you thought “the markets” were those guys in suits shouting at each other on the trading room floor, think again. [image by Coffee Maker]

If you look under the hood of the markets in 2009, you’ll find that the trading floor has been replaced by electronic networks; the frantic, hand-signaling traders have been replaced by computer systems; and all of moves in the trader’s dance—a thousand little tricks and techniques (some legal, some questionable, and some outright illegal) for taking regular advantage of speed, location, and information to generate profits—are executed hundreds of times per second, billions of times per day. And the whole enterprise is mainly powered by the same hardware from Intel, AMD, and NVIDIA, that Ars readers use for gaming.

[...]

Only about three percent of the trading volume on the NYSE is actually carried out by means of traditional “open outcry” trading, where flesh-and-blood humans gather to buy and sell securities. The other 97 percent of NYSE trades are executed via electronic communication networks (ECNs), which, over the past ten years, have rapidly replaced trading floors as the main global venue for buying and selling every asset, derivative, and contract. So the ECNs are the markets in 2009, and those pit traders who pose for the cameras are mainly there for the cameras.

In other words, Josephine Average Stock-Trader is going head to head with supercomputers every time she dips a toe into the game. The ECN algorithms specialise in making millions of tiny trades, each making fractions of pennies of profit – small beer when considered in isolation, but big profits when scaled up to the sheer volume of transactions that these systems can handle.

It’s like a vast virtual ecosystem of predatory code-critters; go find out more about it. Know thy enemy, and all that.

The headlines about the global economic situation aren’t getting any more cheerful right now, are they? While there are many many contributing factors to a complex economic system, a group of UK researchers have suggested that there is a link between the stability of the stock market and the hormonal levels of stock market traders. [image by Petrick]

“But which is the cause and which is the effect? A further analysis showed that traders who started their days with elevated testosterone made more money than those who didn’t. One trader went on a six-day winning streak, making twice as much money each day as the previous one. Over that period, his testosterone levels rose steadily, some 74 per cent.”

The cause and effect question remains open (and probably always will do), but the article suggests that elevated hormonal levels may be very bad for the traders themselves … and that a stock market with more women trading on it might be more stable.

Amen to that.