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.

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.