Stock-Picking Computers

eldavojohn writes "A while ago, Slashdot ran an article on Algorithms used to augment or replace analysts. Today, the NY Times is running an article on stock-picking computers with quotes from the lovable Ray Kurzweil." From the article: "'Investment firms fall over themselves advertising their latest, most esoteric systems,' said Mr. Lo of M.I.T., who was asked by a $20 billion pension fund to design a neural network. He declined after discovering the investors had no real idea how such networks work. 'There are some pretty substantial misconceptions about what these things can and cannot do,' he said. 'As with any black box, if you don't know why it works, you won't realize when it's stopped working. Even a broken watch is right twice a day.'"

Comments

Efficient markets

[Registered Coward v2]

While the idea of stock picking algorithms is neat; market history suggest it won't work a a way to predict performance. What would be interesting is to better search for arbitrage opportunities to exploit faster than others. Of course, eventually others do the same and it becomes an arms race.

Re:Efficient markets

[mcrbids]

It's quite possible that there's so much program trading going on, that you may be able to predict the market (not prfectly, but at least profitably) by effectively predicting what the program traders en-masse are doing. Not that this is necessarily any easier than predicting the mass psychology behind the markets in general, but it does as least point to the fact that much of the market moves according to very deterministic forces.

And this fact is EXACTLY what stabilizes the market!

As soon as there's a discernable pattern, somebody's going to exploit that pattern in order to make more money, and as soon as that happens, the original pattern gets interrupted, thus stabilizing the marketplace. Perfect? No. But damned good. Some regulation is needed to keep these market forces from being overwhelmed - but the cost of this regulation is a pittance compared to the benefits gained!

Money is an awfully effective invention for distributing wealth, which is why the Star-Trek "utopia" where nobody needs money is not going to happen anytime soon. So long as there is differentiation between different people (and thus resource distribution potential) there will be money.

Re:It Works

[OneSmartFellow]

That's not the same as automated stock picking.
Automated trading systems 'generally' are used to take a position in a stock that has already been picked.
So, trader A in Goldman Suchs wants to take a long position (buy) 100K shares of IBM, so he assigns that trade to the algorithmic trading engine, which might offer him various algorithms to help fulfill his position at the best possible price, ranging from %vol, VWAP, 'iceberg' or other type of algorithm.

notice, though, that the trader already had the stock to trade chosen, he didn't let the algorithmic engine choose it for him.

Mr. Lo is not smart enough to teach at MIT

[plover]

I hate to be so mean, but anyone who turns down a job from a fund with $20 billion dollars is just not smart. He could have milked that for 20 years! He could be pouring grant money over his breakfast cereal right now, but "oh, no, sorry, but that's not technically feasible." Fool. ANYTHING can be made to sound technically feasible for the right amount of money.

[ Yes, I am joking. I'm quite sure Mr. Lo is brilliant -- just maybe a touch too honest. :-) ]