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Algorithmic Trading Rapidly Replacing Need For Humans 331

Posted by Soulskill from the digitizing-greed-and-fear dept.
DMandPenfold writes "Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets. Around one third of share trading in the UK is conducted by computers fulfilling commands based on complex algorithms, said the Foresight panel in a working paper published yesterday. Nevertheless, this proportion is significantly lower than in the U.S., where three-quarters of equity dealing is computer generated. The Foresight panel, led by Dame Clara Furse, the former chief executive of the London Stock Exchange, argued that there are both benefits and severe risks to algorithmic trading. There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."
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Algorithmic Trading Rapidly Replacing Need For Humans More

Algorithmic Trading Rapidly Replacing Need For Humans

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  • And through off the computers.

  • http://www.smbc-comics.com/index.php?db=comics&id=2362#comic [smbc-comics.com]

    It's all just busy work.

  • Absolutely (Score:3, Interesting)

    by Anonymous Coward on Friday September 09, 2011 @01:25PM (#37353530)

    As someone who worked at Goldman Sachs, I can completely attest to this; a lot of the software was automated, but what the trading group was always asking for was basically an autopilot system; they wanted to sit back and just let the money roll in. One of them, I remember it distinctly, said that he'd love it if he didn't have to watch all the various windows all the time because he "had better things to do".

    This was the same group of guys who, one of them told me "if I could kill you, not get caught, and make money because if it...I wouldn't think twice".

    Fun times...

  • so SkyNet is really a Wall Street computer? (Score:3)

    by peter303 ( 12292 ) on Friday September 09, 2011 @01:27PM (#37353548)
    The computer that "takes over the world" wont come from a mad scientist's workshop or the military-industrial complex. Instead it will emerge out of Wall Street. There are few stronger motives for Artificial Intelligence than to make lots of money.

    • Intelligence, artificial or otherwise, would be welcome on Wall Street right now.

    • Thanks for not understanding how evolution, or the mind for that matter, works.

      We have facilities for communication and self-identity largely as a result of being hunters -- being able to "run a model" of our prey in our minds was massively useful. This structure then got applied to the self, and so the ego was born. (This is one of the currently en vogue evolutionary explanations for the rise of consciousness -- obviously not a subject you can create causal experiments to test easily).

      What evolutionary p

      • Re: (Score:3)

        by jd ( 1658 )

        Ok, here's one option. You write N herustics and M algorithms (not the same things, guys) and you apply the following rules. (To make it easier to read, I'll use "program" to refer to any herustic or algorithm. This is assumed to cover any implementation, including neural nets, genetic algorithms, ELIZA bots, etc.)

        • Any fresh program is given an initial budget of a fixed amount.
        • A program is "taxed" (to simulate the natural-world overheads of a given form and lifestyle) per day.
        • Any time a program goes into the

    • Re: (Score:2)

      by gatkinso ( 15975 )

      Read "Wealth" by Robert Reed.

  • This is bullshit. (Score:5, Insightful)

    by brxndxn ( 461473 ) on Friday September 09, 2011 @01:31PM (#37353616)

    HFT does not help the market in any way. It does not promote the investing of capital. Going into and out of a company in less than a second is ridiculous. Steps need to be taken to stop HFT in its tracks before the whole market is ruined.

    This will fix HFT:

    1. random delay in all trades.. stick a 100ms to 1000ms delay before all trades are posted on the market
    2. tax all trades by a miniscule percentage.. give straight to government debt
    3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

    • Re: (Score:3)

      by Ruke ( 857276 )
      You assert that HFT does not help the market in any way. I'd be inclined to agree, but that's really just my gut feeling. Can anyone provide any kind of source, one way or the other, saying that HFT is necessary, or good, or terribly evil? I'd like to hear what actual economists think of it, rather than just laymen.

      • Re:This is bullshit. (Score:5, Interesting)

        by LordNacho ( 1909280 ) on Friday September 09, 2011 @01:47PM (#37353856)

        I Googled it. Here's a report about what some researchers think:

        http://www.tradersnarrative.com/what-if-hft-is-actually-good-for-the-market-4723.html [tradersnarrative.com]

        "That public perception may need to be adjusted according to this recent research by finance PhD candidate, Jonathan Brogaard (Kellogg). The paper looks at the effect of HFT on equity markets and through analysing the strategies used by these firms it considers their profitability, impact on market liquidity and volatility.

        There is evidence that high frequency trading contributes to price discovery and liquidity. There is also evidence that it has a minimal impact on volatility and may even reduce it. There is also no evidence that they engage in front-running. HFT demand for liquidity (42.7%) is slightly higher than their supply of liquidity (41.1%) and they provide the inside quote about 65% of the time."

        • Re:This is bullshit. (Score:5, Interesting)

          by dannys42 ( 61725 ) on Friday September 09, 2011 @02:17PM (#37354366)

          The problem with studies like that, and much of the analysis of the stock market, is that it's all done on the numbers. The researchers may be absolutely correct in their study. However, what the current state of the stock market does do is encourage the "wrong" state of mind for many businesses. It's my belief that going public ruins more companies than it helps for exactly this reason (this would be a human study not a numbers study). People start making decisions based on what they thing the investors want that quarter. And to me, that's the surest way to kill a business, as you've now taken away from your focus on your customers and your employees. So while HFT may increase liquidity and all that good stuff, it's doing so at the cost of the long term health of the company. (Not all businesses fall into this of course, but it appears to be more common than not).

          I may not be a serious day trader, but as an (albiet modest) investor, I want a company that thinks long term. And it's my understanding the stock market was originally created for investment purposes. What sort of "investment" is it to put money into company for a second or even a day or a week? I actually think the time window for making trades should be more like one a month or even a quarter or maybe twice a year. With a longer period between trades, I understand people may feel uneasy about the commitment, but I think that's exactly what it should mean to "invest." However, if it's a big enough deal to people, then perhaps you could also have a (shorter) window for backing out (with perhaps a small penalty).

          • That is possibly the best fair criticism I've read about HFT yet. But it's only incidental: You say that market liquidity is bad for business, because it causes short-termism. And HFT makes the market better at what is does, so HFT is incrementally damaging for business.

            Well, you may be right about short-termism, but I believe the discussion mainly centered on whether HFT was good for the stock market. I agree for some firms quarterly announcements create an incentive that isn't so great for them, but those

      • Paul Krugman agrees. He argues that the benefits of HFT are dubious, but the costs essentially amount to a tax on anyone who doesn't have access to a HFT system. [nytimes.com] He also compares HFT to someone who speculates on the market based on confidential information, which has been well established as a Bad Thing for a long time.

      • Can anyone provide any kind of source, one way or the other, saying that HFT is necessary, or good, or terribly evil? I'd like to hear what actual economists think of it, rather than just laymen.

        The empirical impact of HFTs on market behavior and non-HFT traders has been studied, the following paper for example:

        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641387 [ssrn.com]

        From the abstract: "These findings suggest that HFTs' activities are not detrimental to non-HFTs and that HFT tends to improve market q

        • This is in line with the findings of most serious studies. The intuitions of most laymen fail them because they do not understand market dynamics.

          The layman explanation for the market is "One person gets richer off another idiot getting poorer." I get rich by selling my overvalued shit to some tard and then buying some undervalued shit from some other tard. Those guys lose money buying high and selling low. Long positions work one way, buy low from idiot who is undervaluing and sell high to idiot who is overvaluing; short positions work by selling high to idiot who is overvaluing and then buying low back from him after he's lost money. As the ma

      • The prime argument against HFT is that indeed the market worked fine before it. Actually, probably better. Not like the stock markets in the 60 or 70s lacked liquidity, which seems to be the prime argument of HFT proponents. HFT does one thing and one thing only - it allows a privileged group to skim money of each and every trade. Pure parasitism.

        • Do you want to explain how they skim this money? I have yet to see anyone come up with an example that had anything to do with market reality.

          • Re: (Score:3, Insightful)

            by Bob the Super Hamste ( 1152367 )
            My understanding is that HFT get to see incoming orders before they are processed and then react to them. So lets say that some orders come in one says I would like to sell 1000 shares of stock x at $10.00 a share and one of the other orders comes in and says I would like to buy 1000 shares of stock x at $10.01. In this case the HFT puts in an order to buy 1000 shares of stock x at $10.00 a share and then puts in an order to sell 1000 shares of stock x at $10.01 a share. They have effectively skimmed $10.00

      • Re: (Score:2)

        by Znork ( 31774 )

        The response you'll get from actual economists will depend on who is paying them.

        HFT is in its essence neither good nor bad, but it has various issues. As it currently works it does allow manipulation of values by allowing fake offers that are withdrawn as soon as they're made. They can often see orders before most humans and 'cheat', but that in itself is not exactly 'evil'.

        They provide some liquidity, but that liquidity will probably be gone faster than anyone can react in a situation where it would actua

    • I think I agree with this. (I'd like to see a counter-argument if anyone has one.) The one nuance is that I doubt the last one would make much difference... whereas the others are constantly active (and clearly need to be dealt with by traders continuously), the latter is more of a "catastrophic execution" penalty that might be ignored for years, and when it does come into play, maybe the business just declares bankruptcy or gets a government bailout.

    • Someone wants to buy and sell the same stock in the same second. What's wrong with that? He's got his investment strategy, you have yours.

      • What's wrong is that he can do it and I can not. A small subgroup of parasites got enabled to leech on the system. Asymmetry, you see? The thing that should not exist in a free market...

        • What's not free about it? You're not prevented from doing it...

          • Re: (Score:2)

            by H3lldr0p ( 40304 )

            If, by law, you mean someone is not prevented from doing it, then you are correct.

            However, to become a HFT there are a number of substantial barriers to entry you have to overcome. Not the least of which is that many of the privately held markets require you to buy a seat on them. The price of a seat on the NYSE is currently four million dollars. Not exactly change you can find in the sofa cushions. And then there is the capital outlay for the computer systems, the rental for where to house them, the fiber

          • Re:This is bullshit. (Score:4, Interesting)

            by bluefoxlucid ( 723572 ) on Friday September 09, 2011 @02:31PM (#37354602) Homepage Journal

            In communism, the government holds reins on the market and dictates activity.

            In free-market capitalism, big money holders find ways to hold reins on the market and dictate activity.

            Communism is arguably better, except that it's really identical aside from trading "vicious, self-serving market leaders" for "brain dead, incompetent market leaders." It turns out putting idiots in charge is just as bad as putting tyrants in charge.

            It is thus sensible that we would occasionally look at a situation, knee jerk "That's Not Fair(TM)," and then calmly and rationally begin to investigate the unfairness to determine if we can make it fair without doing too much damage. Every time we try to regulate something, there is a cost ... but there are already economic costs, like the out-of-control prices of college tuition and books, or the decoupling of rental property rates from rental operating costs (if there is more money in the area, rent prices go up and the poor get pushed out--in other words, it will always be expensive to live decently, and the middle class will likely continue to shrink while the poverty line continues to raise). Fixing any of these things is dangerous; they're already broken, but you can do far worse.

            HFT is one of these things. It has an economic cost I'm not very interested in (I dislike the practice, but not on any specifically well researched basis), but to regulate it away would also have economic costs. You have to determine if those costs are in excess of the social and economic value gained by eliminating HFT before you even begin to regulate it.

        • I would say the should be able to do it but with the same information that everyone else has. They shouldn't get to preview other orders coming in like they currently do. Oh wait that would remove the incentive to do crap like this as they would then be equal to us plebs then and they can't have that.
    • I got a better idea, add a $0.0005 sales tax on every share that is bought. National debt could be paid off by next Christmas.

  • So what happens when the algorithms start demanding a billion dollar bonus before they'll turn up to work?

  • Additional regulations (Score:5, Interesting)

    by Halo1 ( 136547 ) on Friday September 09, 2011 @01:33PM (#37353634)

    Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets

    Like making it illegal [slashdot.org] for humans to beat the algorithms?

  • Awesome... (Score:5, Insightful)

    by RobinEggs ( 1453925 ) on Friday September 09, 2011 @01:41PM (#37353748)
    I've never been convinced that HFT is anything but a scam to make institutional investors more money without doing more research or making more socially responsible investment decisions.

    The company worth truly investing in, in the sense that you hope it survives and hope it continues to grow as opposed to only making you lots of money, is the one that will treat the environment, their employees, their supply chain, and their customers with respect while paying investors and owners a respectable return.

    HFT algorithms don't give a fuck about any of that, exactly like the stereotypical Wall Street broker doesn't care about any of that; in fact HFT algorithms were written when brokers realized they could make more money in corrupting and managing young mathematicians than in doing their own jobs. HFT just further emphasizes empty, short-term speculation without regard to the product sold, the behavior of the company, or the future potential of the company. It enables the irresponsible greed of people who just want to make a dollar in the next day to become the irresponsible greed of people who just want to make a dollar in the next 0.0000000001 seconds.

    • Re:Awesome... (Score:4, Insightful)

      by FoolishOwl ( 1698506 ) on Friday September 09, 2011 @02:05PM (#37354166) Journal

      If investment decisions are better made by computer program than by human investors, what justification is left for private ownership of capital? And what's the argument against planned economics?

      Can we have another look at the idea of democratically deciding upon our social priorities?

  • There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."

    Or, in other words, "To err is human; to really foul things up requires a computer"

  • The real question is: what was the original purpose of the stock market? What problem is it trying to solve? I guarantee that letting people make money by micro-trading of stocks based on nothing but trends and volatility is not it. It's time to rethink the whole system, but wait, there's a trillion dollars and the stability of national economies at stake. We're stuck with it, short of some kind of (permanent) revolution.

    Time to go read more Trotsky.

    • The real question is: what was the original purpose of the stock market? What problem is it trying to solve?

      Price discovery. [wikipedia.org]
      The entire point of having a market is to find out what the listed items are worth.

      HFTers are not in the market to advance this purpose.
      I'll admit that, as a byproduct of their arbitrage, they help.
      BUT, allowing HFT to continue trades market volatility for market efficiency.
      Considering how lond and hard we've worked to reduce volatility, I suspect it is not a reasonable trade off.

  • The stock markets are no longer about investing in companies you believe in or who have a solid track record. It's just computerized gambling.

    • And gambling is wrong?

      • No I don't see gambling as wrong, but lets tax it like gambling instead of capital gains. That would put an end to it real fast.

        • And why should we end something that we don't think is wrong?

          Also, why does gambling still exist? Surely something is not right.

    • Yes and no. For those on Wall Street it is like gambling (specifically like playing black jack and knowing what the dealers down card is and what the next 10 cards in the shoe are) but for regular people who have investments for retirement and other long term goals not so much.

      • Yeah, for long term investors it's like being the house when the guy sitting at the table playing black jack and knows what the dealers down card is and what the next 10 cards in the shoe are. Usually, the house takes those guys out back and breaks their knees, but it this case, the guy at the table happens to already own the knee-breaking-guys.

  • To previous poster, the stock market is fundamentally designed to put people with cash on hand in touch with entrepreneurs with a need for investment capital. This is NOT what's happening here.

    We had a client who bought one of our software libraries about 7-8 years ago and needed our help to build a trading app that employs these silly algorithms. These flash trading algorithms are exploiting market fluctuations that have little to do with fundamentals and sound investments. First you find a statistician

  • There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage.

    Apparently they are unaware of the 1000 point drop in the Dow [reuters.com] last year that appears to have been caused by HFT.

  • "Both benefits and severe risk" (Score:5, Funny)

    by GameboyRMH ( 1153867 ) <`gameboyrmh' `at' `gmail.com'> on Friday September 09, 2011 @02:38PM (#37354728) Journal

    Benefits: More money transferred to the very wealthiest individuals as traders who can't afford HFT servers (physically as close to the trading floor as possible - at these speeds, light is too damn slow) are at a severe disadvantage.

    Severe risks: Potential for total economic collapse to take place in the blink of an eye.

    I punch those numbers into my calculator and it makes a frownie face.

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