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Quant AI Picks Stocks Better Than Humans

Soulskill posted more than 3 years ago | from the skynet-needs-some-green dept.

The Almighty Buck 446

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."

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446 comments

Bullshit (3, Insightful)

Anonymous Coward | more than 3 years ago | (#32549388)

It's been said before, and I'll say it again. You should ban anyone buying a stock and then selling it within timeframe x (where is 1 week/6 months/1 year). Anything to cut down on the insane bullshit.

Re:Bullshit (3, Insightful)

keraneuology (760918) | more than 3 years ago | (#32549418)

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."

Re:Bullshit (4, Insightful)

Anonymous Coward | more than 3 years ago | (#32549486)

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.

Re:Bullshit (0, Troll)

noidentity (188756) | more than 3 years ago | (#32549588)

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.

We need to fix our regulations. (2, Insightful)

FatSean (18753) | more than 3 years ago | (#32549686)

We do not need to remove them. Regulations keep the playing field more even. Without them we'd see most of the wealth of this country flow up to a select few.

Re:We need to fix our regulations. (3, Interesting)

ulor (1355759) | more than 3 years ago | (#32549948)

Without them we'd see most of the wealth of this country flow up to a select few.

This happened long ago. Anybody remember Mr. Gates or any other CEO and Golden Parachutes and Bail Outs and Bonusess. Most of the wealth of this country is already in the hands of the few.

Re:Bullshit (1, Redundant)

Cryacin (657549) | more than 3 years ago | (#32549716)

Yes, and short trading works wonderfully until there is some kind of unforseen defect in the ecosystem that can trigger a wild buying/selling spree.

Remember that when one of these systems is working by itself, it has a level of complexity, that exponentially grows when completely different systems are attached to the same ecosystem.

If you can find a programmer that would bet their life on their software not being involved in a substantial crash and destabilisation of the worldwide economy, I can show you a programmer that is either stupid, an insane genius, or a guy that's just had enough and has a death wish.

Just look at the "fat fingered" crash recently on wall street. Was it 9%? (I'm sure that some kind pedant out there will provide citation for that figure) that was allegedly caused by mistakenly putting b instead of m into the terminal?!?

Re:Bullshit (2, Interesting)

pyalot (1197273) | more than 3 years ago | (#32549700)

Any security isn't meant to be anything but what the market thinks it is. Any security is subject to movement, which may include up and down, otherwise it'd be pointless to have a "market". Trading isn't Gambling. If anything, buy&hold is gambling like nothing else, because it subjects itself to the arbitary passage of time in the blind (sometimes unfounded) hope a security will rise. Buy&Hold is the ultimate form of gambling, trading is just applying risk mitigating strategies (such as getting out, like, at all) and common sense. Funny how the Buy&Hold suicide investors always like to paint common sense approaches to risk management as "gambling".

Re:Bullshit (1)

Nadaka (224565) | more than 3 years ago | (#32549888)

Buy and hold is much less of a gamble if you are basing your decision on historic dividends instead of changes in the value of the stock to produce the return on your investment.

Re:Bullshit (1)

pyalot (1197273) | more than 3 years ago | (#32549978)

You can just as well put your money in a savings account, dividends (if any at all) pay you in low single digit percentages of what you hold for the most part. However, suppose you made a decision to buy&hold, say, apple stock in December 2007 when it was at 193$ and then saw it drop down to 90$ by December 2008 (and probably no dividends that year). Would you still think that'd have been a good idea? Granted, Apples stock rose again, to eventually surpass your buy-in mark, but that's incidental, you could just as well have bought stock of Alcoa Inc. in May 2008 at 36$, which seems to have dropped down permanently to around 12$. Do you really think that yearly dividends of some say 5%/year would make up for the risk you take that your equity drops 300% overnight and stays there? You'd have to wait a lot of years until you'd have recouped that loss.

Re:Bullshit (4, Interesting)

maxwell demon (590494) | more than 3 years ago | (#32549862)

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.

Re:Bullshit (4, Interesting)

foobsr (693224) | more than 3 years ago | (#32549590)

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.

Re:Bullshit (3, Insightful)

Sir_Lewk (967686) | more than 3 years ago | (#32549894)

especially when taxpayers worldwide are free to pay billions to revive banks

What in the world makes you think insanity like that qualifies as "free market"?

Re:Bullshit (5, Insightful)

hedwards (940851) | more than 3 years ago | (#32549610)

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.

Re:Bullshit (3, Insightful)

roman_mir (125474) | more than 3 years ago | (#32549938)

Bullshit. The free market is what led us to the brink of economic collapse.

- out of the mouth of a guy who looks like does not even understand what money actually is.

You haven't had free market in banking or money supply economics or government spending economics or borrowing economics and the entire debt based economy for decades, starting mostly since the creation of the Fed. What Free Market are you speaking of? The 'Free Market' where the money is printed with no regard to the actual production behind it? The 'Free Market' where Government nurtures Monopolies into existence just to make sure politicians have a never ending money flow for their campaigns? 'Free Market' where Government regulates competition out of existence on the whims of the Monopolies it creates? 'Free Market' that does not allow failures actually to die off and does not allow small competition to step in and replace the failing businesses? 'Free Market' where Government is in business of insurance of every kind, including every possible loan? 'Free Market' where Government pushes incentives to live on debt? 'Free Market' with a fundamental believe that consuming is the main engine of Economy?

Where is this magical 'Free Market' that caused the economic collapse?

This Free Market is nowhere to be found.

The banks that are in business of High Frequency Trading are Monopolies created and abetted by the Government that keeps them being monopolies by providing free money, by creating regulations that kill off competition.

The FDIC - Government's corporation that insures your funds in a private bank - that's the reason for the banks not to care about actually doing right by their customers and getting into risky behaviors like gambling with High Frequency Trading tools.

A person spends less time thinking about the bank they will put money into than about what kind of a vacuum cleaner they'll be buying.

If the government did not provide free money and insurance to banks, if it did not create impossible to get through regulations that only prevent small competition from entering the business of hedging funds or banking but never stops the giant monopolies who already have the money and man power to overcome any and all regulations to continue their business, then banks would actually have to earn the trust of customers.

Banks would have to insure themselves with private insurance companies, who would require a sane amount of capital to be held at a bank and would not allow a bank to over-leverage itself into bankruptcy in case some investments go bad.

Government is the engine of the economic collapse that is happening. Government prints and borrows money, sets insane interest rates, chooses the friends to become giant monopolies, creates regulations that kill off small competition, kills small business by taking away money from people through income tax system that prevents savings and small business from appearing. Giant monopolies have all of the moral hazard of the Government insurance and Free Money.

The monopolies that are manufacturers, also created with government involvement only need an opportunity to shift their giant economies of scale to zones with least production costs. USSR fell apart, the world opened up and the opportunity presented itself - China. The Government, instead of competing with China by reducing regulations, by reducing or completely removing income taxes that prevent small investors from saving and creating small businesses, just started borrowing and printing more. Government does not create anything except inflation and competition killing regulations.

Just like with the preventable incident with the BP/Transocean/Halliburton/MMS oil spill, you can see the government's actions. There are none. They cannot do anything in a crisis.

Same thing with economy - they can't do anything but print and borrow more money and create more regulations. They can make fake census jobs, but those are not productive jobs, they don't reduce the trade deficit.

Government is on its way destroying the economy, and the useful idiots like you still believe what they have been fed their entire life: this is the Free Market.

Re:Bullshit (0, Troll)

mieses (309946) | more than 3 years ago | (#32549994)

You are misinformed. Regulation and its subsequent abuses lead give a false sense of security and entitlement, which then makes the misfortunes worse. It is a fantasy to try to make markets into safe, fair, and predictable money-printing machines where no one is harmed, or where everyone is harmed equally. You can regulate endlessly until you finally kill the market you are observing and gradually make all of the participants lives miserable. The real market will move elsewhere. Read some history.

Re:Bullshit (1)

blackraven14250 (902843) | more than 3 years ago | (#32549950)

The free market entails regulations and not an actual free market or else the whole system is over run by one monopoly, jackass. This kind of trading just makes that happen faster.

Re:Bullshit (2, Interesting)

beakerMeep (716990) | more than 3 years ago | (#32549436)

Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market? I'm not sure I buy it completely either, but I do believe there are some benefits.

Re:Bullshit (2, Interesting)

AnonymousClown (1788472) | more than 3 years ago | (#32549616)

Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market? I'm not sure I buy it completely either, but I do believe there are some benefits.

In theory but the fact of the matter is that when others start to sell or buy, everyone starts to do the same. These trading strategies actually increase the volatility of the market.

Re:Bullshit (4, Interesting)

Trepidity (597) | more than 3 years ago | (#32549636)

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.

Re:Bullshit (1)

hedwards (940851) | more than 3 years ago | (#32549670)

That may be the rationale, but it doesn't. The assumption people make is that short term traders are trading upon the actual realism of the price, when they're doing no such thing. Typically people that trade in intervals of less than 6 months are doing so called "technical analysis" which is ironic since there's no technical knowledge required nor is there any analysis required. Basically they look at a graph and imagine what it means. And since there's a lot of people doing so it becomes a sort of truth. Sort of like how if everybody agrees that a can of sardines is worth $100 suddenly that's what it costs.

The problem though is that these huge short term trades come with costs. One of them is that you get panics. Like in '80s when they had to start instituting emergency breaks. You do get something out of it, the matchmakers make a bit less money, but you get a lot of irrationality and a lot less competent investing as a result.

Re:Bullshit (3, Insightful)

timeOday (582209) | more than 3 years ago | (#32550012)

Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market?

I really think the premise of this is simply to beat everybody to the punch by a few seconds. It is expected that good and bad news moves the market; by moving first, you get money. They're not trying to make better decisions, just a little faster. It's not an inherently productive activity, and it's a pity so many of our brightest minds are wasting their lives gaming the system (taking big slices of pie without helping make more). But I wouldn't pretend to have the solution.

Re:Bullshit (1)

pyalot (1197273) | more than 3 years ago | (#32549656)

Automated systems provide more liquidity to the market, which is good. Also, there's no distinction between an "augmented" human, using a sophisticated program, and a fully automated algorithm, it's a gradient. Telling participants that they can't use automated systems, would be like making market competition the special Olympics, you're only allowed to compete if you can prove you're crippled.

Re:Bullshit (4, Informative)

danpat (119101) | more than 3 years ago | (#32549708)

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 [gresham.ac.uk]/p

Sliding tax rate? (3, Insightful)

wfstanle (1188751) | more than 3 years ago | (#32549942)

There is an alternatively and it just might address the capital gains issue. We tax capital gains at the same rate no matter how long you keep the investment. Why not have a sliding scale that bases the capital gains tax rate on how long you hold on to the stock. Suggested tax rates. At the same time, investors are always crying that capital rates are too high. With this scheme, they would be in control of what rate their investments would be taxed at.

1 second ... 99%
1 minute ... 95%
1 hour ... 90%
1 day ... 75%
1 week ... 50%
1 month ... 35%
1 year ... 20%
5+ years ... 10%

You could even put the tax rates on a continuous scale that negates any advantage to holding on to an investment just long enough to meet a benchmark. Yes, short term investments would be taxed at a confiscatory rate, but that is the general idea. We want to slow down the rate of trading. At the same time, investors are always crying that the capital gains rate is too high. This would put them in control of what tax rate their investments is taxed at. All they need to do is to hold on to investments long enough. This scheme would also favor the little guy who probably holds on to investments for a longer time.

Fantastic (2, Funny)

kandela (835710) | more than 3 years ago | (#32549390)

Nothing could possibly go wrong!

Re:Fantastic (5, Funny)

beakerMeep (716990) | more than 3 years ago | (#32549412)

Based on the words in your post: "Nothing" "wrong" "possibly" I am going to short 835710 shares of KAN and DELA stocks.

Re:Fantastic (1)

WrongSizeGlass (838941) | more than 3 years ago | (#32549514)

By shorting KAN & DELA the only way you'll see a profit is if he gets modded down and you get modded up ... all within 20 minutes ;-)

Re:Fantastic (1)

arth1 (260657) | more than 3 years ago | (#32549594)

Indeed. Imagine once the suits decide that this is the best tool for the job, and quite a few of them have this system. Then, say, a calculated 1.1% drop in stock price for a certain stock would cause a mass short sale of it, which would cause the stock to fall through the floor, which would trigger nervousness for the sector the stock was in, which would cause >1% drops for all stocks there, which would ...

This is pretty much what happened a few weeks ago when stocks inexplicably dropped to near zero, and bourses had to be suspended.

A gambling expert system can only work as long as it is truly unique, and not competing against identical bots. And on the stock gambling market, it is a horrible risk -- the better it is, the worse it is.

Re:Fantastic (1)

pyalot (1197273) | more than 3 years ago | (#32549728)

What you fail to realize is that many deterministic stupid automated trading systems are heaven for a patient trader who can set his stops and limits correctly, he'll just have to wait for the systems to screw up collectively.

aren't bots like this (0)

Anonymous Coward | more than 3 years ago | (#32549644)

what caused Proctor and Gamble stock to lose a third of its stock price in the space of minutes for no apparent reason?

One Citigroup trader fat fingers a trade and sells way too much and the computers start selling like crazy to follow him.

and it never holds a stock for longer (5, Insightful)

wiredlogic (135348) | more than 3 years ago | (#32549392)

and it never holds a stock for longer

So this is really an automated gambling system rather than a tool for investment.

Re:and it never holds a stock for longer (4, Funny)

binarylarry (1338699) | more than 3 years ago | (#32549416)

It's a bot.

I wonder if wallstreet will take Blizzard's approach.

But me, I'm using it. I'll finally be able to get that +5 Ferrari of Laiding I've been lusting after.

Re:and it never holds a stock for longer (1)

noidentity (188756) | more than 3 years ago | (#32549570)

+5 Ferrari of Laying

Re:and it never holds a stock for longer (1)

mustafap (452510) | more than 3 years ago | (#32549630)

>+5 Ferrari of Laying

No, that's the +6 Ferrari of Laying, or -10 Ferrari of STDs if you don't have +10 Common Sense

Re:and it never holds a stock for longer (1)

MoonBuggy (611105) | more than 3 years ago | (#32549466)

Yes. If you consider the stock market to be a tool to enable investment and growth, it's fairly substantially broken. Not totally useless in achieving those ends, by any means, but certainly broken when considered in that context.

Since you or I don't have the power to fix the system, it seems a lot more prudent to exploit it than to ignore it.

Re:and it never holds a stock for longer (0)

hedwards (940851) | more than 3 years ago | (#32549680)

But ZOMG teh soshulists are going to take away our stuffs. Quick thwart them before we have to actually be competent and put in effort to fleece the masses. Pretty much sums that up pretty well.

Re:and it never holds a stock for longer (1)

pyalot (1197273) | more than 3 years ago | (#32549738)

The system's broken in that nitwits like you'd like to fix aspects of it which are actually free markets, instead of stepping on dark-pools and market manipulation like you should.

Re:and it never holds a stock for longer (1)

samkass (174571) | more than 3 years ago | (#32550004)

If you consider the stock market to be a tool to enable investment and growth, it's fairly substantially broken.

Fortunately, that's not what the stock market is intended to be. It's a tool to enable valuation and exchange. And in that sense this algorithm is fulfilling the market's purpose beautifully. If you want the market to be as efficient as possible, it seems like this algorithm helps the market reach new equilibriums faster and thus represent a more accurate valuation of listed assets.

(It's clear to see that the market is not a tool to enable investment because when you buy a share of a company no money is exchanged with said company, and it's not a tool for growth because the stock price of a company has little effect on its growth... in theory the causal effect should in fact be the other way around.)

Re:and it never holds a stock for longer (1)

Kjella (173770) | more than 3 years ago | (#32549494)

Not really, it's more like the sales opening rush except it happens all day long. The fastest gets something that's almost a guaranteed prize, but he has to be faster than everyone else. If he gets there just a little too late, the opportunity is lost. But that should be possible to deduct from the current stock movement if you're too late or not. However, I was under the impression that this was done to death already.

Re:and it never holds a stock for longer (0)

w00tsauce (1482311) | more than 3 years ago | (#32549504)

Yo dawg I herd you like quantitative stocks so we put a quantitative stock program in your program so you can predict while you predict

Re:and it never holds a stock for longer (1, Insightful)

Anonymous Coward | more than 3 years ago | (#32549560)

Tax gains depending on the time stock was held. Held less than 1 day: 99% tax rate. Held more than 1 year: income tax rate. Interpolate. Extremely short term "predictions" on the stock market have no value to society and should not be rewarded.

Re:and it never holds a stock for longer (1)

Discopete (316823) | more than 3 years ago | (#32549784)

Tax gains depending on the time stock was held. Held less than 1 day: 99% tax rate. Held more than 1 year: income tax rate. Interpolate. Extremely short term "predictions" on the stock market have no value to society and should not be rewarded.

As it is now in the U.S., anything held less than 1 year is considered income, whereas over 1 year is capital gains. Pretty big difference in percentage.

Re:and it never holds a stock for longer (4, Insightful)

rundgong (1575963) | more than 3 years ago | (#32549740)

But is not all investment gambling?
The fact that you hope to make a profit in 20 minutes instead of 20 months doesn't really change the gambling aspect.

And how long will it be until all trade bots wants to buy the same stock and then sell it 20 minutes later? It will cause the same problems we've seen before with automated trading running haywire.

Re:and it never holds a stock for longer (1)

Timothy Brownawell (627747) | more than 3 years ago | (#32550016)

But is not all investment gambling?
The fact that you hope to make a profit in 20 minutes instead of 20 months doesn't really change the gambling aspect.

In the 20 minutes version, the size of the pie hasn't changed so you're very clearly betting against someone else.
In the 20 months version, the size of the pie may have changed a bit due to good/bad company management, industry effects, etc. So this can be more about watching your pie grow, rather than outsmarting other people and taking their pie.

Re:and it never holds a stock for longer (1)

Gorobei (127755) | more than 3 years ago | (#32549758)

and it never holds a stock for longer

So, what's wrong with this picture? You buy/sell things that you expect to move by 1% in the next 20 minutes, and you then magically trade out of them after 20 minutes? How exactly are you figuring exit prices on things that have an implied instant annual volatility of 70%+? What's your cost to hedge your overall market exposure? How much slip will you take to scale this to the point you can actually make real money?

Academics seem to love writing papers about excess returns. They rarely can actually convert their ideas into actual money-making strategies. I guess there is a reason it takes quants on Wall St years to learn the real market to the point they are actually taking home $X00,000/year

Re:and it never holds a stock for longer (1)

Yvanhoe (564877) | more than 3 years ago | (#32549806)

Buy-sell cycles of less than 3 months should be forbidden.
This is what communists like Warren Buffet say.

nothing new (0)

Anonymous Coward | more than 3 years ago | (#32549410)

so what's the novel part?
news text-mining has been used for years

Quant vs. Quantum? (1)

Gothmolly (148874) | more than 3 years ago | (#32549430)

How long before the fact that this device is making trades based on other people's trades begins to affect the way THEY trade?

Re:Quant vs. Quantum? (1)

Anonymous Coward | more than 3 years ago | (#32549500)

We might see an evolutionary arms race, where bots actually perfect the market. By that, I mean it becomes impossible to extract any profits from trading, as each and every price is set perfectly. Every trade would then generate a loss due to transaction costs. The end result: the only way to win is not to play.

Re:Quant vs. Quantum? (0)

Anonymous Coward | more than 3 years ago | (#32549674)

i'd like to see what happens between now and when it becomes what you just said
any side effects ?

Re:Quant vs. Quantum? (1)

pyalot (1197273) | more than 3 years ago | (#32549762)

Any double pendulum obeys deterministic rules, yet its state at any point in time can deviate a lot from any prediction. No matter how deterministic each bot in the market acts, the whole market will always be chaotic, therefore there is always room for a system that's better then another system, and be it just that it has adjusted to the other systems behavior better.

Re:Quant vs. Quantum? (1)

pyalot (1197273) | more than 3 years ago | (#32549756)

That happens all the time, the market readjusts its behavior recursively to the behavior of anybody else all the time, and quotes of securities over time are a measure of that adjusting going on.

The world of Finance. (1)

malkavian (9512) | more than 3 years ago | (#32549434)

Ooops, we got things wrong with our last calculations and almost caused a global meltdown.
Now, we're being more sensible and taking a longer view of things. Like about 20 minutes.

Time for Restrictions... (3, Interesting)

aaarrrgggh (9205) | more than 3 years ago | (#32549440)

This type of day-trading provides absolutely no value to the economy and should be regulated to death. Also, I have a hard time believing it would work in the long term, as the news is a lagging indicator 90+% of the time. It might work for shorting in that respect... but even that would be too late and high risk.

All these quant systems seem to do is increase volatility at the expense of the market establishing a general direction.

I'm all for an IRS withholding of 1% on sales of assets held less than a week, and I am a fairly active trader.

Re:Time for Restrictions... (2, Insightful)

Anonymous Coward | more than 3 years ago | (#32549488)

This type of trading provides liquidity and makes a market.

Re:Time for Restrictions... (1)

AnonymousClown (1788472) | more than 3 years ago | (#32549660)

This type of trading provides liquidity and makes a market.

In a very narrow range of market trading. When the shit hits the fan, though, everyone including the computers want to sell or buy (usually panic selling); thereby greatly limiting one's ability to trade - that's why the market crashed a couple of months ago and it wasn't a trader accidentally moving a decimal place.

Re:Time for Restrictions... (2, Insightful)

Anonymous Coward | more than 3 years ago | (#32549662)

And all at the minor expense of of the occasional slight global economic meltdown. Such a great deal, isn't it?

Re:Time for Restrictions... (2, Insightful)

Trepidity (597) | more than 3 years ago | (#32549668)

The problem is that if it's too high volume, it both makes and is the market. If everyone's running a statistical model that says that Event X will cause a stock price increase, the stock price will increase, even if it wouldn't have otherwise.

Re:Time for Restrictions... (5, Insightful)

hedwards (940851) | more than 3 years ago | (#32549718)

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.

Re:Time for Restrictions... (3, Insightful)

Kumiorava (95318) | more than 3 years ago | (#32549720)

And this extra liquidity is a benefit? I could argue that even without these automated bots there is no shortage of liquidity in modern markets.

One of the greatest benefits of liquidity is supposed to be more stable price formation. Unfortunately I cannot believe in the current system where on a bad day swings can be over 50% down and back up, and on a good day stocks bounce around in 5-10% bracket. No company value can move that much during one day, it's all speculation and volatility of these systems.

Stock market needs to go back to the basics where you own a company rather than zero sum lottery tickets.

Re:Time for Restrictions... (0)

Anonymous Coward | more than 3 years ago | (#32549778)

no, specific market makers in the respective stock exchanges do. This type of trading only amplifies stock market movements and causes panics and crashes

Re:Time for Restrictions... (2, Interesting)

DragonWriter (970822) | more than 3 years ago | (#32549872)

This type of trading provides liquidity and makes a market.

Sure, it "makes a market" -- in that it increases the probability that someone will be available willing to buy at some price when someone is willing to sell, and vice versa -- but it does so by divorcing that market from the thing that make markets efficient at realizing utility, to wit, the proximity between the market actors and the costs of production and/or benefits of direct use of the things being bought and sold.

Natural liquidity in a market may have particular benefits, but mindlessly chasing liquidity as an unqualified good is idiotic.

Re:Time for Restrictions... (1)

dnaumov (453672) | more than 3 years ago | (#32549908)

This type of trading provides liquidity and makes a market.

The stock market had survived just fine without computers, let alone high-frequency trading.

Re:Time for Restrictions... (1)

Fractal Dice (696349) | more than 3 years ago | (#32549984)

Actually I do agree that a soup of bots gambling with each other does provide liquidity.

However, the system only provides profit to the money-makers if there is somehow a correlation between a stock being told today and a higher demand for it tomorrow. The bot market essentially manufactures a little bubble around each sale into the market between the time a seller appears and a buyer appears. This provides liquidity through fizz - every time the sellers actually outnumber buyers for any sustained period of time, you will get catastrophic crashes instead of just a drop in prices.

Re:Time for Restrictions... (0)

Anonymous Coward | more than 3 years ago | (#32549710)

Correct, I therefore propose the following rule : "The buyer of a stock must hold that stock at least 5 years".

Re:Time for Restrictions... (1)

pyalot (1197273) | more than 3 years ago | (#32549772)

This type of trading provides liquidity to markets, and there's no way to differentiate the behavior of an automated bot, a smart trader, or a trader with good tools. Do you want to make markets like a competition in special olympics, you can only participate if you can prove you're crippled?

Re:Time for Restrictions... (1)

clarkkent09 (1104833) | more than 3 years ago | (#32549788)

This type of day-trading provides absolutely no value to the economy and should be regulated to death.

Apart from the issue of whether this is true or not, I am curious why are people so quick to support sacrificing economic liberties (such as my freedom to buy and sell whatever I want, whenever I want) the moment the first hint enters their head that a specific activity somehow "provides absolutely no value to the economy". Are you really 100% sure that it doesn't? I think you are not, but even if you are I think you need to consider how low your standards are when it comes to liberty if the only things you would allow people to do are those that are beneficial to the economy.

Re:Time for Restrictions... (1)

Gorobei (127755) | more than 3 years ago | (#32549846)

All these quant systems seem to do is increase volatility at the expense of the market establishing a general direction.

WTF? If a market has a "general direction" it is broken. You think it would be better if people stood around saying "IBM is at $100 now, the general direction will take it to $110 in a week, so let's just sit around doing nothing?"

"General direction" is what realtors use to convince people to buy houses: "don't worry, it is going up."

The mark of a good market is that it has no shills and the aggregate view is that any investment in the market is fairly priced.

uhhh (0)

Anonymous Coward | more than 3 years ago | (#32549452)

if it can beat the system then doesn't the whole stock market become redundant?

Re:uhhh (1)

hedwards (940851) | more than 3 years ago | (#32549734)

No, what it means is that you need to run as far away from them as you can possibly get. The only thing that Wall Street does more efficiently is fleece individual investors. Now they've gotten so efficient that they've managed to fleece tax payers into thinking that it's a better deal to pay more to fix the mortgage crisis than it would cost to just buy up every troubled mortgage in the country.

Re:uhhh (1)

pyalot (1197273) | more than 3 years ago | (#32549792)

Many participants beat the market all the time, and the market hasn't become reduntant because somebody could profit from it. Quite contrary in fact, if the market can't be used to make a profit, it collapses (as happens for instance, in lack of liquidity or in face of exploding volatility).

Needs humans (1)

aegis3d (1610027) | more than 3 years ago | (#32549484)

The thing is... This will only work if the rest of the market are humans, if everybody would use this it wouldn't work. So only one player can use this 'cheat'.

Re:Needs humans (1)

pyalot (1197273) | more than 3 years ago | (#32549620)

Wrong. You could numerous identical incarnations of this system (or more realistically) numerous differently programmed automated trading systems, and have no humans at all, and one or another algorithm would still win, because it was better then the other algorithms.

The point... (1)

Goalie_Ca (584234) | more than 3 years ago | (#32549522)

What is the point of this?? How does this help create a more efficient economy and better society??

Re:The point... (2, Insightful)

MoonBuggy (611105) | more than 3 years ago | (#32549538)

It doesn't. I don't see anybody claiming it does. It makes money for those who created the system. Might not be the most noble goal, but it's sure as hell a sensible one to go for.

Re:The point... (-1, Troll)

Anonymous Coward | more than 3 years ago | (#32549608)

nice take on 'sensible' you have there. you have your barmitzvah coming up soon by any chance?

Re:The point... (1)

pyalot (1197273) | more than 3 years ago | (#32549812)

Profit is the very motivation to participate in a market. The principle of a market is to equilibrate supply and demand, and use enlightened self interest to provide liquidity and balance. Automated systems are just better then humans at it (in some respect), get over it.

Re:The point... (0)

Anonymous Coward | more than 3 years ago | (#32549596)

The magic word is liquidity.

You might not believe this but they provide liquidity for the market, which helps to make the market more efficient.

Re:The point... (1)

pyalot (1197273) | more than 3 years ago | (#32549802)

For instance it can provide liquidity for investors who like to hedge one security with another security (like an option), hence reducing the risk of others. There's many ways in which free-market behavior can be useful, and the very point of a market is to equilibrate demand and supply. Automated trading just does that a lot quicker.

This has already been happening (5, Interesting)

Subliminalbits (998434) | more than 3 years ago | (#32549524)

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 [arstechnica.com] http://tech.slashdot.org/tech/08/09/10/203233.shtml [slashdot.org]

Massively prone to abuse (1)

antifoidulus (807088) | more than 3 years ago | (#32549548)

Essentially all a hacker would have to do to really abuse this system is plant a couple of fake stories on yahoo finance while shorting(or going long I guess) the stock the fake story is about. I doubt that yahoo finance(or any finance web site for that matter) is so secure that they could fend off a horde of attackers motivated by a payday thats potentially in the millions.

Re:Massively prone to abuse (1)

pyalot (1197273) | more than 3 years ago | (#32549822)

Any system that's susceptible can and will be reprogrammed in face of abject failure (and consequent losses) to use multiple independent sources for its input, precisely in order to avoid easy influence taking.

Re:Massively prone to abuse (0)

Anonymous Coward | more than 3 years ago | (#32549840)

"...potentially in the billions."

There fixed that for you.

Bail out much? (1)

Hognoxious (631665) | more than 3 years ago | (#32549768)

The ability to predict the stock market is, as any Wall Street quantitative trader (or quant) will tell you, a license to print money.

Yup - and the great bit is you don't even have to predict it correctly!

and does nothing in the process. (1)

unity100 (970058) | more than 3 years ago | (#32549776)

other than earning its investors more money over money which didnt produce any goods or services while being generated. water vapor. dud. nada. nothing. paper wealth. then it booms, and real sector pays its price, while the money jugglers have become unrighteously rich.

Transaction Cost? Impact? Fundamentals? (2, Interesting)

Sleen (73855) | more than 3 years ago | (#32549848)

A trade every 20 minutes would generate an obscene amount of transaction cost. These are the costs associated with stock trading and any successful Trader/Manager team would seek to minimize these things and create a strategy that maximizes gain for the least amount of trades. Given this system is trading so frequently it would seem to assume zero transaction cost. Quite

I would also think that any more than a few of these trading bots would create a market impact that would nullify the advantage eventually.

Its also kind of weird to invest based on information that is not reliable, or not stemming from the fundamentals of a stocks earning potential. Creating portfolios based on glamour, popularity or essentially inefficiency is a disaster waiting to happen. These gimmiks will work until a catastrophe happens, but by then so much more is committed than is was ever prudent and the damage is done. Investing based on artifacts or involving anything you don't understand with your own 2 hemispheres means that you as an individual are being manipulated and you are investing for irrational reasons.

Unless this technique can be balanced or controlled in a risk management context, or understood at a low level to behave in parallel with existing market benchmarks, then only the penultimate fool would see this as responsible investing and not patent gambling and recreation with your surplus funds.

While I see the expectation of any product to magically increase in value over time as fundamentally insane, there are securities that can offer utility in markets. If this kind of information is really that valuable to a majority then it will eventually be securitized. If this is something that only a minority can exploit and is not private information, some Tony Soprano somewhere in the world will call it illegal. And thats the other reason not to bother - because none of the markets are truly open and will never be truly efficient while goverments are waiting to intervene. Maybe there is opportunity in the many small irrationalities of the human mind since the market participants are almost all human. What else could this information harvesting be capturing besides some departure from fundamental consideration? If the fundamentals are considered and reflected in the price, then any other change is short term and technical, to be nullified.

I should watch what I say lest I bump up Apple stock!

Moneytron (0)

Anonymous Coward | more than 3 years ago | (#32549870)

This reminds me of Moneytron [wikipedia.org] in the 80s, it turned out to be a money laundery scheme.

These anti-trading baboons just don't get it (0)

Anonymous Coward | more than 3 years ago | (#32550018)

There's no big difference in having a bought vehicle and a bunch of AAPL (Apple) stock. Why?
-You buy stock expecting to gain profit. Why else would you buy it?
-You buy a vehicle expecting it to help you gain profit. Why else? To pollute the earth?
-You could also make profit by selling the car with a slight overprice when its older... just to minimize your personal losses.
-You will always end up having more capital than you can consume, thus you are wise and invest it because the inflation will eventually eat your cash savings. Thanks for that goes for your fiat monetary system. The amount of money is not diminishing in the World. This is ensured by your stupid mortgage loans and "value creating" dreams. Look what you have done to the earth!!!

Hypocrites go to church. That's the place for you.

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