hft; what are the facts?, page-8

Hi Gwaihir,

> Yes, the speed and frequency of trades does need to
> be controlled and electronically monitored live.

It's pretty hard for anyone to truly monitor 'live' what HFT is doing and respond - as your 'responses' generally take longer than theirs. ie. you need to do something presumably before they fire off their order. Hard to stay at the front all the time :)

> However, the truly frightening developments are taking
> place in the fields of artificial intelligence, advanced
> neural networks, and intelligent machines.

This is the world of algorithmic trading - not HFT. AI techniques such as neural networks are smart, not fast beasts.

So what I'm saying is, this may be frightening - and we should respond to it - but it is not HFT. These kind of tools will quite happily operate at the 'slow' human response times, but they are just better at certain kinds of analysis. So, reforms that attack 'speed players' will not work here.

I think the rise of data analysis techniques such as neural networks, genetic algorithms and machine learning is inevitable. If they do not rely on raw speed of market data access, then it is hard to say how they could be possibly curtailed. Ban computers completely? Hardly.

The response should be intelligent - and by the rest of the market participants. You have to ask the reason why these systems (no matter how powerful) are even able to second-guess your moves, to keep one step ahead. Slowing them down won't work, they will still be in front.

The answer is for you to work smarter: stop placing orders in even 100's or 1000's (showing your hand that you are a human placing the orders), randomise your times, stop acting in packs. Stop using the same charting techniques. Stop being so predictable: at the end of the day their 'advantage' is just that you are giving them the data to second guess you!

> You will note that this year, the United States had
> it's first Non-Human company officially legally
> registered. The company is completely run by artificial
> intelligence, all decisions are made by advanced
> intelligent neural networks, all communications (both
> electronic and non-electronic ie. human/electronic
> interfaces) is made by machines.

Did not know that. What's the name of it - I guess the AI decided that too?

> For instance, for the first time in it's history,
> only this year Goldman Sach's staff lists showed they
> now employ more computer programmers working on stock
> market trading algorithms, neural networks, and
> artificial intelligence systems, than stockbrokers and
> traders. The traders are being replaced.

Traders I think were replaced long ago - I think the Goldman Sach's numbers are lagging a bit here; true HFT firms really employ few traders (relatively) - and they are increasingly baby sitters for the algos anyway.

> I have attended at some of these universities, after
> conferences, and most people would not believe the
> advanced state of these research projects in relation to
> the stock market, and what is being hypothesized, built
> and tested. It truly is an Orwellian vision of the
> future, in which increasingly, all human decision making
> is being replaced by intelligent learning algorithms.

There is a silver lining - there are AI tools that your broker should be providing to you. This sounds a little like progress - the people who avoid using the new tools complain about the 'advantage' obtained by others. Like printing, electricity, internet etc.

> And it is here now. At it's basic level though, it turns
> any stock exchange into nothing more than a casino, with
> the machines simply stacking the odds, and controlling
> prices and percentages, without any recourse to the
> fundamental work done by a company, or the individuals in
> that company.

Markets have always had an aspect of casino about them - except the exchange (the house) does not take anywhere as much. You could think of the ASX being a casino - but it is a casino that lets anyone participate on an equal access basis. A true casino only lets you sit on one side of the table - the losing side.

What you're concerned about is the fact that someone has an advantage on you. Time for the disadvantaged to respond.

> Increasingly you will see things like, when a company
> makes a great discovery - their share price will go down,
> and vice versa, you will see more share price spikes on
> no news. The market becomes devoid of all fundamentals,
> and it loses all semblance of the meaning of why a market
> was created in the first place.

This is true in the short term, but remember that HFT finishes square at the end of the day. While they can participate in spikes, they have no control (or care) about the long term fundamentals. Are we overstating the 'tragedy' of what are short term interferences?

I am not making excuses here for HFT - but just concerned to keep things in perspective, so all of the concerns don't get thrown out as overblown :)

> I posed these questions with 2 of my local members of
> parliament, federal and state. They both responded by
> saying there is nothing wrong with the markets or
> algorithmic trading, it is being done in the United States
> so it will be fine here in Australia. They both completely
> missed the important points, and neither had the slightest
> interest, because there is more votes in having their
> photo's taken with cute smiling babies in shopping centres
> on a busy Saturday morning.

I'm not sure that the trading population has much more idea, to be honest. Asking a politician is brave - yes this is a long way away from the 5 second sound-bite.

I think the 'problem' with algorithmic trading, from your perspective, is it's a tool (advantage)that you don't have. What if you could have it? I think the retail brokers have been seriously amiss here. What if I had an offering that could up-skill you, would you be interested?

> Technically, the terminology High Frequency (or HFT),
> is but a side show, compared to what is coming.

Machine learning systems are already pretty embedded, but I agree things are going to scale up from here.

The term High Frequency Trading is really only used because people identify with it: High Speed Trading, or Automated/Algorithmic Trading would be more accurate.

While I appreciate the terminology being a side-show in some respects, it is still important in identifying two things:

- the advantage of speed
- the advantage of smarts (artificial intelligence)

These are two completely different things, with different solutions required. We don't want to confuse them or you'll end up aiming for both and hit neither. That was the point I was trying to make in distinguishing the terminology.