Slashdot Mirror
Algorithmic Investors on Wallstreet
eldavojohn writes "Recently, setting up prediction markets that people play was the big thing to guess the future. But is there a chance that computers will replace investors? From the article: 'Quantitative investment managers use a model to identify sets of characteristics for their investments. Computing power is now relatively cheap. Obviously, computing power can access data almost instantaneously and simultaneously. Asset classes and financial instruments within those asset classes can then be screened and investments are selected. They reflect the manager's views.'"
My work here is dung.
Big deal, computer models have influenced trading for decades. And not only would it be "irresponsible" to fully automate trading (as the article states), it would also be "illegal". Computer-driven market analysis and prediction is a huge industry -- the big firms spend vast amounts of money on it. I'm not seeing what's newsworthy here, for slash or for El Reg.
Slashdot quality declines as the number of hot grits posts decreases. - Provolt's Law, Apr-09-2005
Why would it be "irresponsible"?
And no, it's not illegal, but there are some exchange rules on it - depends on the exchange. See here: Program Trading
The efficient market hypothesis states that the price of a stock reflects all that is known about a stock. It is therefore impossible to outperform the market on a long term basis. http://en.wikipedia.org/wiki/Efficient_market
Warren Buffet has outperformed the market over many years. http://en.wikipedia.org/wiki/Warren_Buffett
Buffet understands the economy and invests accordingly. The computer programs only understand the market. In other words they can't really respond faster than the rest of the market. Buffet can be years ahead of the market.
http://science.slashdot.org/article.pl?sid=06/08/2 1/1646238
Until you can look at the numbers of a company and know everything about that company with certainty (meaning that a human _could_ do it if they had an infinite amount of time), or until we have computers that are great at telling when people (enron) are bluffing, I'll stick with investmant companies that rely predominantly on humans.
Mozy, free online backup service
--
Hedge funds are sometimes seen as the "smart money,'' and their managers hailed as market iconoclasts whose quirky, daring trading styles are central to their success. But some of the smartest traders are often beaten by an unlikely foe: the room full of man-high Hewlett-Packard computers that are the brain of AHL.
http://tinyurl.com/ke2ey
Let's assume that we could do that, setup a bunch of algorithms wich only purpose is to make money. And let's assume that this AI is much better than a human at making market decisions, it always pick the best choices, it always wins.
If that happens, and if all the investitors has access to such software, my bet is that the whole point of investing on market will flop. Since everybody will always "win", nobody will actually make a huge profit, the money will enventually be equally distributed among all investitors.
The sad thing about capitalism is that there's always a fixed amount of money on the market, so to win somebody else has to loose. If we make a super AI, that always wins... nobody will, because to win someone has to loose.
In the end this could mean a good thing, and we can turn our attention from pure profit to things that really matters.
---- You know how some doctors have the Messiah complex - they need to save the world? You've got the "Rubik's" complex
I suggest you go out and read "Debt of Honor" by Tom Clancy. As always, he fabricates and exaggerates, but all the same it will give you a very good idea why reliance on a computer trading model is a "Very Bad" thing. I.E. - if you know how a computer program works then you know how you can break it or cause it to react. If you can do that, then suddenly you have the power to control the market. Clancey went a bit further theorizing that a programmer was bribed to place an easter egg in the system, but all the same the ideas are there and are valid.
When everyone is crunching numbers on their head, the computing might give an advantage. If everyone is computing with compters, the advantage goes to the one with better algorithm. And the better "algorithm" might actually turn out to be thinking and looking at the global picture instead of madly computing.
When huge trades are decided by these algorithms it is almost like a huge herd of milling cattle. When the stampede, just get out of the way. But if someone could trigger a stampede and send it over the cliff, there will be rich pickings later. And in free markets, if there is a way for someone to make money, someone will.
I think algorithmic investing is the new name for the old "programmed trades" and it might actually make the thinking and studying fundamentals investors richer.
The code is
if( InputDataIsGood() && AlgorithmIsGood() && AlgorithmIsBetterThanOthers()){
Output(profit);
}else{
Output(loss);
}
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
Old headlines apparently.
(durn lameness filter! if the original had a greater percentage of caps, why can't I quote it without extra text like this!)
-- 3 events that reshaped the world in the 20th century: WW1, WW2, and WWW
Yeah, it's smart to be in the market because you are getting the money of all the people who aren't on the market but spend money at these publicly owned businesses.
But the real growth of the economy is all based on debt, the government decides how much to lend out and that decides how big companies get and how much money there is to pay workers and stuff.
Of course, if you get too much money out there relative to other countries (like now, where the government has been printing $500B per year of new money in the form of debt), your currency falls and your money is worth less and less. You can only push so far before people begin to lose confidence. Having a good leader can really help out the confidence, both in and out of the country. But the economy is showing that it could take the huge infusion of money pretty well and we're sending it to China and they're still taking it so what do we care?
Now, what's going to happen when we move to one world currency? Well, it's going to be a long process and there's going to be a big war and eventually we'll all settle down and we can all move a bit slower. But as long as there are more people than there is available water, food, energy, etc. it will not be possible. I think we will probably hit that population number soon. I like to follow the progress of the "Euro" because that was a major major change for the world that we haven't even felt yet. In the West we have most of S. America tied to the dollar now. Since Europe is now the biggest economy in the world, once they get the kinks straightened out, free up trade between the member states and drop tax rates, they(you) are going to be a force to reckon with.
The only country with anything to fear right now is Russia; they have a huge land mass with huge resources and on the outside you have overcrowded China and Japan in the East, and Europe on the West. But I like the Russians, I think they are some of the most brilliant people. I think they will be our friends.
Cool! Amazing Toys.