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Sudden Demand For Logicians On Wall Street

Posted by samzenpus on from the most-popular-guy-on-the-floor dept.

An anonymous reader writes "In an unexpected development for the depressed market for mathematical logicians, Wall Street has begun quietly and aggressively recruiting proof theorists and recursion theorists for their expertise in applying ordinal notations and ordinal collapsing functions to high-frequency algorithmic trading. Ordinal notations, which specify sequences of ordinal numbers of ever increasing complexity, are being used by elite trading operations to parameterize families of trading strategies of breathtaking sophistication. The monetary advantage of the current strategy is rapidly exhausted after a lifetime of approximately four seconds — an eternity for a machine, but barely enough time for a human to begin to comprehend what happened. The algorithm then switches to another trading strategy of higher ordinal rank, and uses this for a few seconds on one or more electronic exchanges, and so on, while opponent algorithms attempt the same maneuvers, risking billions of dollars in the process."

34 of 525 comments (clear)

  1. Well at least... by ls671 · · Score: 4, Interesting

    Well at least, they seem to start to realize that perpetual growth is impossible to achieve in a finite universe. For us, right now, this means our planet.

    We may need to start businesses on other planets until we have conquered the whole universe in order to maintain the illusion that perpetual growth is possible.

    Yet, the whole point of investing in the market is more or less (at least it was traditionally) based on a perpetual growth principle where there would always be new markets to conquer thus, rising stocks on average and a perpetually growing economy.

    Since they seem to begin to realize that perpetual growth is impossible and that trading is what they have done all their life, they need to keep the profits coming in anyway. So they figured that by using "high-frequency algorithmic trading" they could keep the profits coming in.

    Well, at the expense of whom ? How long can this trend be maintained before major problems arise in the economy ?

    --
    Everything I write is lies, read between the lines.
    1. Re:Well at least... by serps · · Score: 5, Insightful

      How long can this trend be maintained before major problems arise in the economy ?

      before problems arise? Have you not been paying attention for the last two years?

      --
      "Einstein argued that [...] God is not capricious or arbitrary. No such faith comforts the software engineer." ~ Brooks
    2. Re:Well at least... by ls671 · · Score: 4, Insightful

      > Technology is a wonderful thing - each year we're able to do more with less.

      A perpetually growing economy usually involves the average wage rising so average people can buy more stuff while still working less.

      Have you looked around lately ? In fact you are right in some way: every year we need less people, so by the market rule, the average wage goes down relatively to what you can buy for a dollar on average, especially food and lodging.

      --
      Everything I write is lies, read between the lines.
    3. Re:Well at least... by sqrt(2) · · Score: 5, Interesting

      And bullshit like high frequency trading (really the entire concept of trading in derivatives, I hesitate to say the entire stock market in general because at its core there is something useful) only makes things worse - and at a faster rate. Every year a bit of wealth from every person in the lower 90% is siphoned off by traders and bankers and given to the top 10% or less. Over the decades a self reinforcing, self perpetuating system has been created, linked with government apparatuses that give it the appearance of legitimacy; this system rewards people who produce nothing of value, make nothing, enrich no one's lives, do not create art, do not expand the sphere of human knowledge, and provide no meaningful service to humanity or the country.

      When it's possible to get rich just managing other people's capital and skimming off the top then the way we organize our economy is broken. This house of cards cannot stand forever when you stack more and more of those people on top of the working class, the foundation, that actually produces wealth and knowledge.

      --
      If you build it, nerds will come. Soylentnews.org
    4. Re:Well at least... by mwvdlee · · Score: 5, Insightful

      Some people are mentally defective and will only be happy when they have more than others. Two such persons and they'll keep fighting eachother until everybody loses.

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    5. Re:Well at least... by SupremoMan · · Score: 5, Funny

      But wealth trickles down! That's why we need to lower taxes!

      Disclaimer: That's a funny, not a troll.

    6. Re:Well at least... by Jah-Wren+Ryel · · Score: 5, Insightful

      this system rewards people who produce nothing of value, make nothing, enrich no one's lives, do not create art, do not expand the sphere of human knowledge, and provide no meaningful service to humanity or the country.

      If only it were so simple. Efficient allocation of capital is extremely useful. It enables all kinds of progressive development that would never occur otherwise and stock markets (and derivative markets) are the best way humanity has come up with to do it. You might as well be arguing that farmers' markets and cattle auctions are just as useless - all they do is provide a meeting place and a means to buy and sell - they create nothing.

      It should come as no surprise that the system can and is abused - that's pretty much the case for every system man has ever come up with. But to argue that capital markets are nothing more than siphons from the poor to the rich is to throw the baby out with the bath water.

      --
      When information is power, privacy is freedom.
    7. Re:Well at least... by alfredos · · Score: 5, Interesting

      I subscribe that and add that the stock value concept is indeed useful but has been twisted beyond recognition. If I try to think about it with a clean sheet, I can't find a real reason why a company that manufactures screws is worth 10% more at noon than at 9 am and then 10% less at market close.

      The company in my example behaves like most companies. They are going to open the next day and sell a bit more or a bit less, manufacture about the foreseen number of screws, some employees are going to get hired, others fired, others retire... Yet the swing in value of the whole company is based around news and rumours. Traders will "discount" this or that news on stock price of our happy screw manufacturer without even bothering about the steel stock or last month's sales. Some will buy stock and make a profit by noon if they are lucky, or loss at close if unlucky.

      Now, what does all this have to do with manufacturing screws? Isn't there much more in common with Casino Royale than with industry and people building things and making a living out of creating something of value?

      I attended a conference two years ago where an accountant explained that the concept of stock worth is fatally wounded. His theory, which I also agree wholeheartedly, is that stock should benefit the stockholder with dividends, i.e., with the net value generated by the company's activity. Not by the increase in the value of stock itself in the short term. Now there is a place for investors, he also said, who invest in stock and sell the stock. But that kind of operations ought to be separated by months or years, when actually the stock reflects the increase in the value of the company. Not by minutes, when the increase in value is nothing more than a throw of dice, even if you attach fancy and serious names to it.

    8. Re:Well at least... by Ultracrepidarian · · Score: 5, Insightful

      The trickle has taken on a decidedly yellow tinge.

    9. Re:Well at least... by AK+Marc · · Score: 4, Insightful

      I hesitate to say the entire stock market in general because at its core there is something useful

      The "fix" is to have trades once every minute, and no more than that. Trades are executed to the number of "requests" times 90% (if there are 100 sell requests and 200 by requests, the lowest number of 100 is taken, multiply by .9 and so there will be 90 trades that minute). The sell and buy orders are randomly selected and then processed. Those passed over will be at the top of the queue for the next minute. I'm sure it would take some serious refining, but the idea is to completely eliminate microsecond fluctuations, eliminate priority trades, and make it "fair" for all. Either that, or make the market completely open where anyone can log on from anywhere and do a trade as if they are a broker. That would introduce many more problems than just batches and delays with limited processing, but it would fix many of the problems we have now.

      But, anyway it goes, there needs to be a complete re-write of the stock market. It's been perverted from the paper trading to a good-ol-boys network of computers with systemic abuses aimed at hurting people trying to use the system in good faith. As it sits now, abolishing the stock market and having companies sell their own stock in paper in person at their corporate headquarters would be a massive improvement. Sadly.

      --
      Learn to love Alaska
    10. Re:Well at least... by stygianguest · · Score: 4, Informative

      Stock markets for efficient allocation of capital, sure. Derivative markets, that's questionable, and in some cases downright laughable.

      There are many different kinds of derivatives. Some of them are very useful. For example, futures are very useful in farming where it gives relatively small producers a way to insure themselves agains e.g. bad weather.

      That said, contracts that would now be called futures played a big part in the tulip market crash in 1637. But they needn't be bad, just because they can be abused

    11. Re:Well at least... by Tom · · Score: 4, Insightful

      So they figured that by using "high-frequency algorithmic trading" they could keep the profits coming in.

      "Profit" in the extended meaning of the word. There is no value being generated at the exchange, only well, duh - exchanged. So the value that they take out of the market ("profit") is something someone else had put in.

      Well, at the expense of whom ? How long can this trend be maintained before major problems arise in the economy ?

      Welcome to our time traveller from 2005. You may want to read up on the news to find your answers there. The short version:
      a) everyone else
      b) about 4 years, which were over in 2009.

      --
      Assorted stuff I do sometimes: Lemuria.org
    12. Re:Well at least... by TheLink · · Score: 4, Insightful

      It's also about marketing, bullshit and "plausible deniability".

      This is so the gamblers can give better excuses/bullshit for gambling with other people's money. This way everyone can say it's some sophisticated stuff that few people understand, so they get to keep their bonuses and profits when it all blows up.

      Here's an analogy: the financial system is a casino. The casino doesn't produce any "real" wealth - it just distributes it. The Federal Reserve produces the casino chips (trillions of them if necessary). The casino operators take their cuts+fees. The players gamble with OTHER people's money (pension funds etc), and when they win they get pay raises and bonuses. If a single gambler loses big, he loses his job. If a huge bunch of gamblers lose big, they say "bail us out". How can a huge bunch of gamblers lose at the same time? They can if they play a "let's create fake wealth" game.

      Here's a popular version: you start with a "parcel". You sell it for a profit to the next person. And the next person may do the same thing and so on. Whoever currently holding the parcel is allowed to declare that they are richer by the current "outside" value of the parcel. When the "music stops" the parcel is opened and the holder gets whatever is inside (which may be a bunch of IOUs).

      It doesn't really need very much sophistication to play such games.

      Here's another game: this is a trading/auction game: a few players pay the casino a special amount and they then get to see other people's bids 30 milliseconds[1] before everyone else does and they also get to make bids and cancel their bids rapidly. Naturally this is very profitable for those few players, unless there is a bug in their software, and they make a big loss in which case they ask the casino to rollback the trades, or change the rules so their losses are limited.

      This needs a bit more sophistication if you are aiming for maximum profit since your program has to "battle" the other programs. But the few with the 30 millisecond advantage should make money from the rest.

      Lastly, the gamblers who get sacked for losing will often get rehired since even if their companies lose big and maybe even go bankrupt, they make their _bosses_ rich.

      [1] http://www.nytimes.com/2009/07/24/business/24trading.html

      Simplified version of how it works:
      http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html

      --
    13. Re:Well at least... by metacell · · Score: 5, Interesting

      There is no reason better production methods should lead to unemployment in the long run. When production becomes more efficient, resources (like labour, capital and natural resources) are freed up to do other things, and so far, humanity has showed an incredible ingenuity in coming up with new things to produce and consume.

      Three or four hundred years ago, the majority of the population worked in agriculture. Today, we produce more food than ever, with only a few percent of the population tied up in agriculture. If we had said back then, "We must stop the industrialisation of agriculture, or the farmers will lose their jobs!", there would have been no one to work in the factories and produce the cars, toys, medical equipment, cheap clothes and furniture, and all the other things we have become used to today.

      The problem with unemployment is not that we have become too efficient in producing goods and services, but rather, that we have become worse at letting new, innovative providers of goods and services establish themselves on the market. Large corporations effectively block out competitors through patents, anti-competitive behaviour and friends in high places. Governments watch the backs of large corporations because they are afraid that they will go out of business and a large portion of their voters would lose their jobs - not realising they are at the same time helping the corporations stunt the growth of new businesses and new jobs.

    14. Re:Well at least... by seyfarth · · Score: 4, Interesting

      ...When it's possible to get rich just managing other people's capital and skimming off the top then the way we organize our economy is broken. This house of cards cannot stand forever when you stack more and more of those people on top of the working class, the foundation, that actually produces wealth and knowledge.

      I think we need a federal stack exchange tax. If every trade is taxed, then the millisecond trading scheme will disappear. Instead people will think long and hard about investments and invest for long enough periods to make more profit than the initial tax. Of course if they were taxed as heavily as the sales tax I have to pay on food, then they might be investing for dividends rather than profits.

      Is there any better way to convert our casino-like stock exchange into a real investment system?

      Wouldn't this help with our federal deficit?

      --
      Ray Seyfarth, ray.seyfarth@gmail.com, http://rayseyfarth.blogspot.com
    15. Re:Well at least... by Anonymous Coward · · Score: 4, Interesting
      I recently worked as a developer writing exchange gateways for a high frequency trading firm that traded with their own money, not other people's.

      They were designated as a Market Maker, and their supposed purpose was to provide quotes on financial instruments.

      Theoretically, the price for the same instrument should be the same on all exchanges, but in reality, there is lag. So, this company would pay for the fastest possible connection to each of the markets, and then sit and watch. Although What their real bread and butter was arbitrage, and they have automated systems that take advantage of lag between updates of the same instrument (usually derivatives) on different markets.

      Basically, they'd see an instrument raise a fraction of a cent on one exchange, and they'd then buy a TON of it on another exchange and sell it back to the first exchange, all within a few milliseconds. Dumping all this would then cause the price to drop on the exchange they just sold it on, because the buy they executed on the second exchange would sometimes take a while to get back to the first exchange. Once all this instability started happening, it'd spur other people to start buying and selling - and they'd have an even greater opportunity to take advantage...

      The whole system was very "clever" - but completely devoid of adding any real value to the market.

      The company was investigated for some criminal behavior, but because they were very careful not to break the letter of the law in what they were doing - the law couldn't touch them.

      I could give more details, but I'm afraid I've already said too much - because I certainly do not want to be identified by the company for fear of some kind of retaliation, either above or below the table

  2. Self regulating? by dna_(c)(tm)(r) · · Score: 4, Interesting

    So, the next global financial crisis will happen a lot sooner? This is not a good thing. They invest in speculation instead of companies.

    1. Re:Self regulating? by Anonymous Coward · · Score: 5, Insightful

      That's one of the stupidest comments I've ever heard on here. No, really. It is.

      Long term investment is the POINT of a stock market. It's to encourage the private sector to ALLOCATE MONEY EFFICIENTLY toward PRODUCTIVE activity. Shuffling money around constantly and making the only "productive" part the cut you get for the shuffling (not the actual thing you invested in) completely defeats that purpose. It's called RENT SEEKING by the banks and traders, and it's a BAD THING. It encourages money to be allocated poorly in a short sited fashion, only doing whatever will make the most commission for the trader and his company. It does the opposite of what the stock market was supposed to do.

      Great googly moogly have people become so blinded by day trading as to think making money on the trading was the point of the market? If that's the way you're thinking, then just withdraw your life's savings from the bank, drive your ass to Las Vegas, and start "investing". You can be well ahead of Wall Street's curve on what they're trying to sustain: a massive legalized national casino.

    2. Re:Self regulating? by sqrt(2) · · Score: 5, Insightful

      This is one of the best comments I've read about this issue.

      Too many people see things exactly as you describe. The "market" is just an abstraction, they don't make the connection to the real world companies that they are investing in because they don't see that as the point anymore. It used to be that you could take a small amount of money, invest it in a company with a good idea - along with many other people - and you could profit from it too. Getting money to people with good ideas, and letting people who could never start their own company have a chance to be involved in the process of business, that was the goal. Now, Wall Street is about finding new ways to creatively move, funnel, transfer, shuffle, and convert money so that when it comes out of the other side of the black box it's more than you started with. It might as well be a casino, instead of a random number generator or dice you have the ups and downs of real companies creating the random seed.

      It would be funny if not for the fact that the rest of the US, the world really, are subsidizing this farce and allowing these people to get rich doing nothing productive.

      --
      If you build it, nerds will come. Soylentnews.org
    3. Re:Self regulating? by Tom · · Score: 4, Insightful

      It's a fundamental flaw.

      The incentive to do the right thing (long term investment into production) is - money. If there is another way to make the same money easier or faster, or make more money or even make more money easier and a lot faster, then a rational participant in the market will do it.

      Now, the stock market is a closed system - any buck that the day trader made, someone else had to put in. The stock exchange doesn't generate any value. So if nothing else convinces you, then ask yourself where all these short-term pure trading profits come from. If you still haven't realized after all the bailouts: It's you.

      Can't really blame the traders. They ran a highly profitable scam for many years, then it all blew up. They probably couldn't believe their luck when the tax payer stepped up to cover all the losses and didn't even stop the scam. So heck yes do they continue, of course. Who wouldn't?

      --
      Assorted stuff I do sometimes: Lemuria.org
  3. And the moral is: by Mathinker · · Score: 5, Insightful

    Buy gold.

    (Half in sarcasm, since if the world economy collapses totally, it would probably be better to have something like, say, food.)

    1. Re:And the moral is: by Inzite · · Score: 5, Interesting

      There's a long-running joke among financial types....

      If things are gonna get worse, buy bonds.
      If they're gonna get much worse, buy gold.
      If you're still worried, buy canned food, ammunition, and land in New Zealand.

  4. Zeno just called by martin-boundary · · Score: 4, Funny

    He wants his arrow back... with interest :)

  5. Practical Joke? by the_povinator · · Score: 5, Interesting
    I am wondering whether this story is some kind of practical joke.

    As someone who understands math to at least a certain degree (I publish in what is effectively applied mathematics), I know enough to say that this is bogus. The Wikipedia page on ordinal collapsing functions (http://en.wikipedia.org/wiki/Ordinal_collapsing_function) shows that they relate to transfinite numbers (various orders of infinity). It is, to me, beyond plausibility that this could have any practical application in trading-- unless it's some kind of weird fad that only the mathematicians understand is a joke. I think someone needs to dig down further into this source.

    --
    The .sig is dead, and I believe I had a hand in killing it.
    1. Re:Practical Joke? by Anonymous Coward · · Score: 4, Interesting

      IANAST (set theorist), but my guess is that there are uncountably many trading strategies that don't allow for response to the other players strategies, but they can be indexed by ordinals (assuming choice). Furthermore, there is probably some kind of ordering on them so that a< b if b beats a. Transitivity would not be obvious (you probably would get somewhere if you restrict to some "good" subset or use some weaker sense of "beats"). Anyway, assuming that there are \kappa such strategies, and assuming that \kappa has infinite cofinality you choose one strategy, and then someone else chooses a strategy that beats yours, so you use a larger ordinal (which then beats the other strategy). To index these larger ordinals you would need a way to represent them with finite data, hence the ordinal collapsing function. Terrifying. Set theory gives me nightmares.

    2. Re:Practical Joke? by cobaltnova · · Score: 5, Interesting

      The point would be that anyone who isn't playing the game this way would be playing the game according to a strategy for some fixed kappa. Then you beat them automatically. I'm not sure such a well-ordering of strategies exist. Ostensibly, this is probably what the mathematicians are being recruited to determine.

  6. has anyone taken into account by nimbius · · Score: 4, Interesting

    many stocks are valued entirely on speculation? how does one apply logic to that? what about crap like derivatives trading? effectively a "dont ask, wont tell" sort of thing based entirely on what you "think" the value of something that has no value might become?

    --
    Good people go to bed earlier.
  7. Lies, Damn Lies and Theft! by Iffie · · Score: 5, Interesting

    Complexity in these algorithms is only to hide the fact that the are FRONT RUNNING trades, they have servers that are directly next to the ones performing normal trades and using the speed that affords they put themselves between buyers and sellers. Goldman Sachs steals 100 million USD every day. To hide this theft they claim sophistication. Same story with derivatives, they are FRAUD. to hide the fraud they are made 'complex' using the work of so called Quants. It is thieving and it is nonsense.

    1. Re:Lies, Damn Lies and Theft! by Anonymous Coward · · Score: 5, Insightful

      The same banks that perform HFT also act as brokers. They know where everybody's stop losses are. They can run your stops and cause you to sell, while triggering other people to sell the market short, then run the market back up and cause the shorts to cover, and cause you to buy again so you don't miss out. Rinse and repeat.

    2. Re:Lies, Damn Lies and Theft! by ortholattice · · Score: 4, Interesting
      Micro-timing has no purpose other than to take advantage of ordinary investors who don't have access to this information. It basically amounts to a kind of insider trading.

      I would propose that ultra-short-term profits should be taxed at a punitive rate, perhaps approaching 100%, to discourage this kind of cheating of ordinary traders.

      Already, short-term capital gains are taxed at a different rate than long-term gains, in order to encourage long-term investment. Micro-timing is short-term trading taken to an extreme, so why not tax it accordingly?

      There is no valid reason why anyone should trade a stock multiple times per day - either it is pure gambling or there is some inside information behind it. Companies report their revenues and profits on a quarterly basis, not microsecond by microsecond. (Of course news stories may affect a stock, but even news stories rarely change more than once per day.)

    3. Re:Lies, Damn Lies and Theft! by DemApples · · Score: 4, Insightful

      I worked at one of the banks being lambasted here in a group that I left, within a year my peeps advised me that the group disappeared OVERNIGHT with no explanation. They pay big money to make the SEC an empty shell of what it's supposed to be doing (policing them). We need a big legal fence put up to keep these sharks away from "cash in a barrel" situations like being brokers and traders for the same products, and we need to vet any and all new products that hit the marketplace. Do we not remember the $4/gallon gas situation, an overnight doubling in price caused by pure speculation when we allowed oil companies to act as their own brokers? Wall Street banks bought oil companies and started Milken the public like crazy (pun unavoidable). Trusting Wall Street to not grab any and all cash it can any way it can is like trusting a starving 20 foot python to babysit your infant.

  8. Funny thing about these trades by JimboFBX · · Score: 5, Informative

    If you watch a stock in real-time you can predict where it will move quite easily. Thanks to automated trading, you can just draw a line of best fit based on the stock's current direction and also determine a high and low amount of noise to where it will bounce around. Computer's have no idea how much a stock is worth, they just simply use these values to determine when to make a transaction and actually help self-perpetuate everything by being the major driving force behind a stock's movement. Changes in direction are caused by actual human intervention, such as a large buy order spaced out over several minutes.

    For example, if an algorithm says "the high point is at $10.50", then when the stock gets that high it will sell the hell out of it until it bumps the price lower. Then when it says "the low point is $10.42", it buys the hell out of it again. However, if it notices an overall downward direction, it will reshift what it's idea of a high point and low point are as time progresses, helping to self-perpetuate that downward direction since it is probably one of many automated systems that work similarly and overwhelm actual human interaction with the stock price.

    It's not necessarily a bad thing, if you realize this, then you can easily predict a stock's movement and make some easy income; knowing exactly where the low and high values are going to be at any point in time. Again, the only thing that causes a stock to change its movement is actual human interaction that results in the trend being broken.

  9. The markets need to be forcibly civilized. by Cordath · · Score: 5, Interesting

    Margaret Atwood once described civilization as the judicious trading of "freedoms to" for "freedom from". e.g. You trade the freedom to murder anyone you like for freedom from being murdered yourself. While a rather distressingly large percentage of Americans would scream "COMMIE PINKO!!!" at me for daring to suggest this, I feel that the stock markets could stand to be civilized a tad.

    What is the purpose of the stock markets? Are they meant to be a video game played by A.I.'s for big cash prizes, or a way of facilitating investment and trade? It's time to find ways of restricting high frequency traders. While cumbersome regulations are one option, perhaps a per-trade tax or user-fee would be better. A tiny one, percentage wise, that will only have a significant impact on high frequency traders. Cuts to other taxes could be made to offset them for average frequency traders and perhaps even benefit low frequency traders.

    There are, naturally, many other ways to approach this. All it takes is resolve and, in the U.S. at least, thick skin.

  10. An unemployment person isn't an opportunity? by Fractal+Dice · · Score: 5, Insightful

    4 seconds is too long to leave an opportunity of more efficient reallocation of capital unexploited, yet there are people who have been unemployed for over a year? This implies that we've created an economic system where it is a more efficient use of resources to rearranging ownership of theoretical constructs than finding a place in society for people who have none? Doesn't it seem that we've sort of lost sight of what the purpose of an economy is?