HFT - Robot Wars

Robot Wars

This animated GIF created by the Nanex pictures the rise of high-frequency trading (or HFT) volumes across all US stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: not just unsettling, it’s terrifying.

HFT trading volumes across all U.S. stock exchanges between 2007 and 2012
credit: Nanex Research, hosted by imgur.com

This is what high frequency trading looks like, when specially programmed computers make massive bets at lightning speed.

We don’t know is what the long term consequences are of all this hyper-volume as depicted by the Nanex GIF and the kind of systemic risks created from the market’s ongoing evolution from human traders to rapidfire AI. Sometimes things go wrong, a software glitch, an algorithm gone rogue and the music stops, like a couple weeks ago when Knight Capital lost $10 million a minute when it’s trading platform went haywire or during the infamous Flash Crash when the Dow dropped 1000 points in mere minutes.

Read the excellent full Mother Board article here.

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Superstition ain’t the way… Or is it?

Technology, social networks, and big data undoubtedly help portfolio managers to create new asset allocation strategies and techniques. You have probably already heard of using social media sentiment analysis to support asset allocation choices. The best known example has been the Derwent Capital Markets’ Absolute Return fund aka the “Twitter fund”, a hedge fund using Twitter for investment direction (by the way, the fund has been liquidated: read about it here).

But reading of a Superstitious Fund Project really blew me away:

The Superstitious Fund Project is a live one year experiment where an uncanny algorithm or SUPERSTITIOUS AUTOMATED ROBOT will trade live on the stock market. The financial instruments it will be using will be spreadbetting on the FTSE 100. The superstitious trading algorithm will trade purely on the belief of NUMEROLOGY and in accordance to the MOON. It will for example have the fear of the number 13, as well as generating its own beliefs and new logic for trading.

The Fund is a one year experiment. The algorithm behind the fully automated robot creates patterns based purely on superstitious beliefs throughout the year, ranking and deranking superstitions. They are then used as a new logic in trading.

As a one year experiment, £4828.88 was invested from participants over 50 cities around the world. After one year, the balance will be returned at either a profit or a loss.

In my opinion, the experiment is useful to highlight two contrasts: the growing (and potentially dangerous: remember the Flash Crash?) intrusiveness of algorithms and trading systems in asset management, and the increasingly irrational behavior of managers and investors in spite of the enormous amount of data and research available today.

For more info on the experiment, check the official website and Twitter account.

Savings

An Efficient Financial System

Indian charity Butterflies are giving street children a new start in life through education and banking.

A bunch of Indian street kids set up a model bank with tens of branches all over South-East Asia.

In order to save money for a brighter future, they have created their own bank, where they can deposit their money and take advances whenever they need to. A branch of this unusual financial institution is located in a shelter for homeless runaway teens in New Delhi. It’s here that street children who work come to place their money for safekeeping, and take out development or welfare advances to start a business or invest in things they need for school. The most impressive thing about this bank for kids and teens is that it was initiated, implemented and is operated by children. In fact, Satish Kumar, who was elected bank manager for the New Delhi branch of the children’s development ’khazana’ (Indian for ‘treasure chest’) doesn’t look a day over 12.

In a time when the global financial system seems more vulnerable than ever, it looks like a bunch of kids have everything figured out. During monthly meetings they review applications for advances, and based on everyone’s track record of saving and earning, they decide who can get the money and how quickly they have to pay it back. They hold everyone from the account managers to the clients responsible for their financial decisions.

Original article: RT.com

Leaderless World

The G-Zero World

I agree on every single word:

We live in a crisis-prone age. In the past 44 months, we’ve endured the dips and gyrations of an international financial crisis, the worst economic slowdown since the 1930s, a wave of turmoil across North Africa and the Middle East, and Europe’s worst crisis of confidence since the Second World War. Unfortunately, we can’t expect smoother sailing in years to come because, for the first time in seven decades, we now live in a world without global leadership.

[…]

So we’ve entered a period of transition. The old order, call it a U.S.-led G7 world, no longer reflects the true international balance of power. But there is not yet a new order to take its place. That’s why global markets are in for an extended (and tumultuous) period of transition, one that’s especially vulnerable to crises that appear suddenly and from unexpected directions. It’s a G-Zero world.

(mon emphase) — Ian Bremmer on the Harvard Business Review Blog

The Ties That Bind

Researchers from Tel Aviv University, in collaboration with the Kiel Institute of World Economy in Germany, have developed a new methodology that measures the interconnections between stock markets across the globe.

It has the potential to serve as an early warning system and provide measures to manage and mitigate the spread of financial crisis.

There’s nothing new in analyzing the correlations between stocks in an individual market, using parameters such as market index and volatility to determine whether prices of stocks will rise or fall in tandem. But with this project, the researchers have introduced the concept of the meta-correlation, in which they measure the average correlation of countries’ stock markets against one another. The result is a precise understanding of how changes in one market impact another. At worst, these connections can lead to a fast spread of financial crisis.

To develop their method, the researchers looked at data from six major world markets — the U.S., the U.K., Germany, Japan, China, and India — from the beginning of 2000 to the end of 2010. Choosing the leading stocks in each market, the team then mapped the correlations between the groups of stocks from each country over the 11-year period. With the exception of China, which tended to operate independently, the researchers discovered an interesting pattern of interdependencies between these markets. Some markets, such as the U.K. and U.S., were closely connected, as predicted. But there were also surprising findings, such the fact that Japan fluctuates in its financial alignment between western and eastern countries.

A Financial Seismograph

According to the researchers, this method of understanding market connections could help each country predict when a financial crisis is imminent, allowing it to set up policies that will protect their own markets from becoming dangerously intertwined with struggling markets. As Prof. Ben-Jacob of TAU’s School of Physics and Astronomy says:

In the current era, when the global financial village is highly prone to systematic collapses, our approach can provide a sensitive ‘financial seismograph’ to detect early signs of global crisis.

Citing Greece’s financial problems and their impact on the European market as a whole, Ben-Jacob’s Ph.D. student Dror Kenett continues:

There are different safety mechanisms that each country can implement. Germany is so invested in Greece that they don’t have an option other than to bail Greece out

noting that if it had been able to see the extent of their dangerous connection with Greece, Germany could have opted to reduce its investments earlier.