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Quant AI Picks Stocks Better Than Humans
Mr_Blank writes with this excerpt from an article at MIT's Technology Review:
"The ability to predict the stock market is, as any Wall Street quantitative trader (or quant) will tell you, a license to print money. So it should be of no small interest to anyone who likes money that a new system that works in a radically different way than previous automated trading schemes appears to be able to beat Wall Street's best quantitative mutual funds at their own game. It's called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes — and it never holds a stock for longer."
and it never holds a stock for longer
So this is really an automated gambling system rather than a tool for investment.
I am becoming gerund, destroyer of verbs.
Based on the words in your post: "Nothing" "wrong" "possibly" I am going to short 835710 shares of KAN and DELA stocks.
meep
Why? How? By what authority? The free market is better than anything else - unless you like a system where they say "ok... we'll protect the little guys by setting up a tier system. If your portfolio $5,000,000,000 then you have to wait six seconds. Everybody in the middle, 1 month."
By what authority? In the USA stocks are regulated by the Securities and Exchange Commission, part of the federal executive branch. Other nations have similar regulatory/enforcement agencies. Please tell me that you aren't really this ignorant about a subject you've decided to comment on?
As others have pointed out, stocks and bonds and other securities are meant to be investments, not gambling. Treating them as one big casino is the behavior that tends to destabilize an economy, especially by favoring short-term gain at all costs - even at the cost of severe long-term loss. Witness the housing bubble. It was precipitated by speculators who bought property they had no intention of living in because they hoped to resell them at higher prices. Housing prices cannot keep going up forever, especially not when at the same time banks cause foreclosures by deciding that credit worthiness is no longer important when determining eligibility for loans. None of this would have been such a big deal if all of the people buying the homes intended to live there indefinitely.
What do you think happens when you treat American corporations the same way, as one big casino, and come up with new and better tools to help you do your gambling? There are network effects and not many people seem to want to consider them.
Ars Technica wrote an interesting article about this almost a year ago. What is happening now isn't anything all that new. As several people have already mentioned, yes this is dangerous because these tools trade in extremely large sums. Slashdot even covered United Airlines stock dropping from $12 to $3 when the news crawler for one of these tools thought an old story was new and the tool proceeded to dump its entire United holdings causing a massive sell off by other investors. http://arstechnica.com/tech-policy/news/2009/07/-it-sounds-like-something.ars http://tech.slashdot.org/tech/08/09/10/203233.shtml
The free market is better than anything else ...
Exactly; especially when taxpayers worldwide are free to pay billions to revive banks and companies are free to take shortcuts every way they want (if things get really bad, there is always chapter 11).
CC.
TaijiQuan (Huang, 5 loosenings)
>The free market is better than anything else
Citation required.
Open Source Drum Kit, LPLC deve board - mjhdesigns.com
Bullshit. The free market is what led us to the brink of economic collapse. Short term trading is probably the largest factor in the rather routine occurrence of market failures. Because the average period for holding a stock is around 6 months, there's no incentive for corporations to look any further into the future. Even when the risk is terribly obvious they don't do anything to avert it. There's been a steady drumbeat in recent decades for fewer dividends and more growth. The problem is that dividends are paid to investors as a way of keeping them around, and as it turns out it's a lot harder to have steady growth and a regular dividend than it is to grow for periods.
And actually you've got it backwards, if you've got a massive portfolio then you should be required to wait longer than smaller investors. Small investors cause far fewer problems in this respect that institutional ones do. They can do crazy things like sell a portion of their holdings triggering a panic, then buy them back knowing what the price will be in a few moments time. The suggestion you're making that they don't harm everybody else is ultimately bullshit.
I don't think it does much for market irrationality. It does provide liquidity, though, which is good in reasonable amounts: means that if you want to buy or sell a stock right now, you don't have to wait for another long-term investor who wants to make the opposite transaction, but can buy from or sell to one of these people who are always churning their holdings.
It can be a problem if this sort of statistical-trading volume swamps the "real" trading, though. Ideally an exchange is supposed to send price signals that reflect some sort of external supply and demand, but if, say, only 5% of the market participants are normal market participants, and 95% are trading with 20-minute horizons based on statistical models, you've got a weird feedback-loop market that reacts mostly to itself.
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
Short term trading generally creates market liquidity, which is necessary for the market to function even remotely efficiently.
Without liquidity, we would likely see wild fluctuations in the prices of stocks, creating an even more unstable and unsure environment. Take a read of the wikipedia page (http://en.wikipedia.org/wiki/Market_liquidity) to get a better understanding. This behaviour can be seen today in exchanges where trading volumes are low and on stocks with low trading volumes (penny stocks, etc). The concept follows over to many things in life. Imagine if you were required to keep any object your purchased for a minimum amount of time before reselling it (house, car, iPod, etc). You would lose control of selling it at a time that works best for you. Very likely, you'd stop buying. This is fine for non-essential items, but the same applies for base needs like food, water and fuel. Crazy fluctuations in those items costs would likely lead to some pretty bad problems. Likely, strategies for flattening out the craziness would appear, and they would work by creating liquidity somewhere in the system that wasn't regulated.
If you crippled liquidity, you'd likely get *more* insane bullshit, not less.
There's a pretty good explanation of why liquidity is generally a good thing to have in the lecture given here: http://www.gresham.ac.uk/event.asp?PageId=45&EventId=640/p
I assume you've never heard of "dividends." They're what used to drive investments prior to computers. Back in the day people would rarely buy and sell on a time period of less than a couple years, because it was somewhat difficult to get in and out efficiently. Hell, I remember even in the 80s, you'd typically be restricted to only checking prices once a day. Well, unless you were a broker or were glued to the TV.
What that does is decrease the cut that the matchmakers get for brokering the deal. However it doesn't harm the market, there are still stocks, most notably Berkshire Hathaway, which are barely liquid and they do just fine. You just Don't expect to trade it immediately. I know it's terrible to possibly have to wait an hour or two, but it's worth it if it cuts these jack ass jackal cheats out of the picture.
You know what a long term investment is ? a short term investment that failed...
It takes 40+ muscles to frown, but only four to extend your arm and bitchslap the motherfucker
Well, if the stock exchange is used as a casino, maybe they should use the same rule casinos use: If you win too much, you are not allowed to continue playing.
The Tao of math: The numbers you can count are not the real numbers.
http://www.robschumaker.com/publications/IEEE%20Computer%20-%20A%20Discrete%20Stock%20Price%20Prediction%20Engine%20Based%20on%20Financial%20News.pdf
Here's the difference.
The economy as a whole isn't a zero sum game. I invest some money in a company, it makes something of value and increases the overall size of the economy and (rightly) pays dividends.
20 minute speculative bets are zero sum. In 20 minutes nothing of value was created. When I buy something for a $1 and then sell it for $1.01 twenty minutes latter I'm not growing the economy, I'm taking $0.01 from someone else.
This shit is perverse. Not only does it destabilize the economy, it's literally skimming money off the top of the real economy to line the pockets of a few wealthy investors and traders who, speaking from an economic perspective are dead weight. (and then they complain about welfare...)
You should read up on the free market. What we have is not a free market. All the regulations you support are there to attempt to fix problems caused by yet other regulations.
This argument is just silly. A regulation-free market is just another name for anarchy. You wish you had more money than that other trader? No problem, shoot him and take his money, or kidnap his kids and slit their throats unless he agrees to buy them back from you. Don't want something similar to happen to you? No problem, hire a private army of mercenaries to protect yourself. One of your mercenaries is getting a bit ambitious, and sneaking into your room to murder you in the night? Tough, you should have hired a more reliable mercenary.
Regulations are there so that people can conduct their business with at least some confidence that they won't be completely screwed over by every other actor in the market at the first opportunity. Without that confidence, people simply wouldn't trade -- they'd keep all of their money in a locked box in their basement, and spend it mainly on armed guards, and there would be no market, "free" or otherwise.
Yes, some regulations are no doubt unnecessary. But to say that all regulations are only "there to attempt to fix the problems caused by yet other regulations" is to throw out the baby with the bathwater.
I don't care if it's 90,000 hectares. That lake was not my doing.
Standard Oil, Triangle Shirtwaist Fire, Pullman Strike, and the Pinkerton Militia. Now shut the fuck up and crawl back into your cave of voluntary ignorance while the people that didn't get a D in US History talk about how not to avoid our past mistakes rather than desperately try to repeat them as though 100 hour child-labour using workweeks where you were locked inside a building with no windows or fire suppression systems are something to idealise.
Go jerk off to some pictures of Ayn Rand or something.
A bullet may have your name on it but splash damage is addressed "To whom it may concern."
No, the wealth would spread around to anyone who was willing to take a risk and was successful.
And who is it who has the excess resources necessary to take a risk? Oh yeah, the rich. If they risk a lot of money, and lose it, they can fall back on their reserves and try again next year. The rest of us can't afford to risk very much, since failure would cost us our livelihood. That's why the rich tend to get richer, and the poor tend to stay poor.
I don't care if it's 90,000 hectares. That lake was not my doing.
I call bullshit.
What we have now is exactly what we were told dishing out the billions of dollars would fix.
Well, it hasn't fixed it. In fact, the vast majority of new jobs are government jobs, which actually subtract from the economy, not add to it. It isn't hard to argue that the problem is now worse than it would have been had we simply let things collapse. It's nearly impossible to prove, since we didn't do it that way, but it's clear the bail-outs didn't work as promised. Though the talking heads will keep saying it did - you know the old saying: repeat a lie often enough, and pretty soon everyone will believe it.
There are a lot of people who believe that had we let the fools fail, other companies would have taken up the slack (this actually happened in the areas the Fed didn't deem important enough to save). For about the same cost in jobs we would have seen a rebound and a much more stable, if poorer in the short term, economy.
Instead we've propped up the failing system. We're rewarding companies for making shady deals and bad decisions. Yeah, that's definitely going to promote a healthy economy.
Security is mostly a superstition... Avoiding danger is no safer in the long run than outright exposure. - Helen Keller
There are HFs using this strategy now using dedicated reuters feeds and trading in microseconds. This means new information is impounded into stock prices well within a second. In the article they used yahoo news and minute by minute stock data? That's laughable. I suspect the reason for their returns is that they they are indexing the time information arrived, and the price you could trade at that instant incorrectly. In other words the information arrived at t + 5 seconds, and they execute the trade at the quotes available at time t. Also I suppose they are not including margin and transaction costs, reasonable slippage, and risk-adjusting their returns?
Nah, look at the successful people in history, and see that almost all of them got helped off to a great start in life by wealthy parents. Then notice that the news stories are all about the tiny few who made it in spite of the lack of advantages, precisely because it is surprising and rare.
"Who is the Journal of Quantum Physics going to believe?" --Stephen Hawking
You're telling the story of the exceptions. That's precisely who everyone writes about and finds interesting. Most wealthy people throughout history are inheritors. Families often keep their wealth through 4 or 5 generations, so for every one 'real' success, you have 30-50 wealthy people who achieve success only because of the helping hand of their ancestors.
"Who is the Journal of Quantum Physics going to believe?" --Stephen Hawking
Bravo!
Every time the free market fundamentalists start their proselytizing, we need to remind them where their religion inevitably leads. Randroids are as bad as (and have a great deal in common with) Marxists, in their total inability to separate their belief in what should happen according to their ideals from what actually happens in the real world.
The correlation between ignorance of statistics and using "correlation is not causation" as an argument is close to 1.
When the trucker moves the widget from the factory to the store, he changes its value by moving it from the place of creation to the place of use. Any student of economics knows that major economic leaps have taken place when the costs of this have reduced - from carts to canals, from canals to railways. This is because there are real costs involved; you can regard the energy and investment in moving goods as being exactly as much part of their manufacture as pressing or welding. But the electronic transfer of the stock market transfers ownership at negligible cost and therefore adds no value, so any price increase is simple inflation.
This is exactly what has happened to the economy: house prices inflated, share prices inflated, but the actual value of the underlying assets barely increased. We are now trying to reduce a debt which is purely the difference between perceived value (what people will buy things for) and their inflated value.
The fact that people like you believe the nonsense you have posted is the underlying fact behind the financial crisis.
From scarped cliff or quarried stone she cries "A thousand types are gone, I care for nothing, no not one."
Originally, the stock market was not a form of gambling but a form of insurance. Investors in trade voyages in the days of sail and marine anarchy expected that some ships would not come back, therefore they wanted to be able to invest in multiple voyages. Joint stock companies formed to carry out a voyage would then sell shares, spreading the risk. (They did this at Lloyd's Coffee House in London.) The sale of shares meant that the money they had invested in the voyage came back to them before the voyage was complete, thus creating liquidity (i.e. the joint stock owners had cash again to invest in new voyages before the first ones returned).
Short term trading is purely gambling, but does not necessarily create any more liquidity than long term investment. Hence my observation that your comment is bogus.
From scarped cliff or quarried stone she cries "A thousand types are gone, I care for nothing, no not one."
Close, but no cigar.
That 0.01 is NOT taken from somewhere else. It is "generated" but generated from nothing. It is the air in the bubble and then it bursts. We had this long before, the great depression was build on it. EVERYONE speculated. And LOTS of money was being generated it seemed, but where did it come from? Nowhere.
You might have heard of the phrase "your ship coming in". Where does it come from?
At least in part from the old dutch practice of funding the sailing of a cargo ship by writing out shares. Anyone could fund some money to build/outfit a ship and would in turn get a share of the profits it would generate on its voyage. This was a long term investment as a voyage to the far east could take 2 or more years. It was a also risky, you could build a bridge to the far east out of all the lost ships (oh okay, you can't but it sounds dramatic).
Now say that I took a share of 100 florins (a shitload of money but a nice round number to work with). I watch the ship sail and hope that it will come back in 2 years time with a fat cargo of spices that will trade for a fortune. My ship will have come in. Or it will sink.
BUT this ship does not exist in a void. It will encounter other vessels. Say that six months out it has crossed the horn of Africa. A seriously risky part of the journey. It comes across another ship making its way back and this ship reports what has happened to Holland. What happens to my share? Well nothing EXCEPT that SOMEONE might be willing to pay me more then 100 florins for it because the risk of it failing has now been reduced. My share has increased in POTENTIAL value. Someone with 200 florins might buy my share. I get a lower but certain profit while that person will gain less of a profit IF the ship comes in but has a higher chance of it then I did.
Other factors can add or substract from this. Say that it has been a calm year at sea and I get news that dozens of ships are making their way back. The price of spices will fall. Less risk of no return but less profit. Or say that nobody has yet reported on my ship at all. Risk has sky rocketed that it has sunk and my share is without value. Might I sell it lower?
THAT is stock market speculation. Betting on the POTENTIAL value of something. The problem is NOT with the speculation itself. The problem is when the speculation starts to be based on nothing. Those ships need to build, to be sailing, to be buying and selling cargo in order for there to be anything to speculate on. And that seems to get forgotten.
The speculation is no longer about the chances of the ship making it with a good cargo but on the speculation itself. Speculators no longer follow the shipping news but share prices themselves.
Take the recent price drop of BP shares. Why? Because of the oil spill? The company makes 60+ million profit PER DAY! The cost of the oil spill are spare change. Yes it will hurt their bottom line a bit but it is really just the cost of doing business. There should be no selling going on because the company is at no risk. Without speculators, there would be no selling going on. No long-term investor would have a reaosn to sell. Not buy perhaps but not sell since selling when a stock is going down means you are loosing money. Only the short term speculators have to sell because they can't afford to simply wait out their investment and need their money now.
We have allowed the stock market and the banks to turn themselves into "THE economy". A bank should be a service provider that real business makes use of. The same a law firm or cleaning company. Instead they have come to think of themselves as the most important part, the very engine of the economy. It is silly.
Imagine this. A justice system is part of civilization right? But when you consider the justice system to BE civilization, I think you would not like the results.
Don't confuse the means with the end. The tool with the goal.
There is nothing wrong with speculation, there is something wrong with
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