01 September 2015

Ex Machina Wall Street, Bots Have Taken Over the Markets

A world prone to "computer stampedes"--
If you're first out the door, that's not called panicking. Margin Call (2011)
Rise of the bots - Fortune: "In short, algorithms are taking over our lives. An algorithm is simply a piece of software code that operates like a decision tree, considering multiple variables and then spitting out a decision or recommendation. (A bot is typically a collection of algorithms.) Without taking a step back, as Christopher Steiner does in Automate This: How Algorithms Came to Rule Our World, it’s hard to appreciate how fast and far algorithms have come in recent years, and what the consequences are for modern culture. Steiner, a former Forbes writer, set out three years ago to explain how trading algorithms (which, in their simplest form, make buy/sell decisions based on various data inputs) had overtaken Wall Street. By that time, wildly complex trading bots had transformed financial markets..."

High-speed trading, also known as High-frequency trading (HFT) in action:

Citadel Group, a high-frequency trading firm located in Chicago, trades more stocks each day than the New York Stock Exchange. (CNN, July 2013). Domain name: citadel.com
"While it may take weeks before regulators understand why the plunges occurred, one reason for the swing is that automated computer programs have changed how markets function… Orders are being executed at lightning speeds in huge volumes. But there is another, often overlooked implication: these machines are being programmed to link numerous market segments together into trading strategies. So when computer programs cannot buy or sell assets in one segment of the market, they will rush into another, hunting for liquidity. Since their algorithms are often similar (or created by computer scientists with the same training) this pattern tends to create a “herding” effect. If a circuit breaks in one market segment, it can ripple across the system faster than the human mind can process. This is a world prone to computer stampedes." - FT.com, Aug 27, 2015 (emphasis added)
"... if you think it was human beings executing sales of Starbucks (SBUX) down 22% on Monday’s open [24 Aug 2015], you’re dreaming. And if you believe that it was thinking, sentient people blowing out of Vanguard’s Dividend Appreciation ETF (VIG) at a one-day loss of 26% at 9:30 am..." - Josh Brown

Just remember:

"... despite its obvious attributes “Black Box” trading [is] very tricky. The algorithms may work for a while [even a very long while] and then, inexplicably, they’ll just completely “BLOW-UP”... The real challenge ... [is] to “sniff out” the degrading model prior to its inevitable “BLOW-UP” .... “because, you know, eventually they ALL blow-up“… as most did in August 2007..." - Black Box Trading: Why They All “Blow-Up” | GlobalSlant

XKCD
Caveat Emptor!



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