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Humans Lose $21 Billion To Computers On Wall Street

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Is the Singularity already happening at Goldman Sachs?

"Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed," writes the New York Times' Charles Duhigg in a front page piece that’s been the talk of the town in New York and Washington. "High-frequency trading is one answer." Duhigg writes, “High-frequency trading systems are so fast they can outsmart or outrun other investors, humans and computers alike."

The term “high-frequency†refers to fast entry and exit of trading positions, the process best executed by algorithms and dedicated computer programs employing artificial intelligence. However, this can turn into the intentional probing of the market with tiny orders that are immediately canceled at speeds that cannot be matched by individual human investors.

While this isn’t quite the "intelligence explosion" of machines foreseen by I.J. Good in 1965 and dubbed “the Singularity†by Vernor Vinge in 1993, the speed and sophistication of Goldman Sachs computer algorithms are indeed leaving humans –- at least, individual investors –- in the dust.

Investment Manager Irene Aldridge sees high frequency trading as having a bright future that is “bound to bring additional skill and capital†to markets. She points to Tabb Group estimates that high frequency trading (HFT) accounts for 73% of equities trading volume on U.S. exchanges. Aldridge: “HFT is characterized by fast turnover of capital. Instead of capturing large price changes over extended periods of time, HFT aims to book multiple small gains over short periods of time.â€

Joe Saluzzi, Partner at Themis Trading, sees it differently. He bemoans the institutional use of co-located high-bandwidth supercomputers near the trading floor, “We are just mice dancing between the elephants of capital and their supercomputers. Just this past week, we found out that hedge funds have passed mutual funds in terms of volume of equity trading, despite controlling far less money.â€

This video shows the intensity of the debate over HFT, with Joe Saluzzi expressing mock surprise that he isn't debating a supercomputer (shades of Kubrick’s HAL 9000):

There are several possibilities about what’s going on here. One is that Goldman and others are literally using privileged information to make trades ahead of markets, in which case they are committing a felony. Specifically, this is known as "front-running," or trading ahead of customers, and it is an explicitly illegal form of market manipulation.

Another possibility –- mentioned by Robert Kuttner in a recent Huffington Post article –- is that “the Goldmans of the world†have found themselves a nice loophole. Tapping into the Stock Exchange's own computers and other sources of trading activity is something that anyone in theory could do, but only a few privileged insiders have the sophistication to exploit what they find.

Stock ExchangeDuhigg’s New York Times article illustrates a case in point. Intel, the computer chip giant –- reporting robust earnings –-triggered some individual human investors to buy shares in the semiconductor company Broadcom, “The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.â€

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to “a collection of high-frequency traders for just 30 milliseconds -- 0.03 seconds -- in what are known as flash orders.†In just this fraction of a second, high-frequency traders determined that the market for Broadcom was growing. Their supercomputers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise, “The slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.â€

Supercomputers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise

Was the actual advantage the speed of the supercomputers? Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their paying customers the opportunity to gauge demand before traders on other exchanges get the chance to bid. While the ethics and legality of this are debatable, Senator Charles Schumer has asked the U.S. Securities and Exchange Commission to ban such “flash orders,†saying the transactions give high-speed traders an unfair advantage over other investors.

“Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public,†writes Schumer. This allows “those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity.â€

Regardless of the debate over how HFT is used in market trading, it’s clear that supercomputers can already “outrun and outsmart†individual investors. This isn’t quite the Singularity envisioned by Good and Vinge, but it raises some perplexing questions about the use of artificial intelligence to gain market advantage when individual humans “with slide rules†cannot compete.

Yes. I know some of you slam me for posting this stuff, but read it and just understand that you haven't a chance as an amateur investor.

What is happening here is 'front running' the trade. These kunts are scooping fractions of a penny off of every trade, but to the tune of a few hundred million dollars a day, in an 'the office' vein. It is illegal in any sense and the only reason they aren't in the slam is because they built the system and no single entity, including government, has the skill, capital, or resources to examine it and remove the corruption. FFS, you have Paulson and Geithner working as treasury secretary, who both were high ups in Vampire Squid! Coincidence? Fvck no. They just worked Bush/Obama over and guaranteed the Squid an almost unlimited 0% loan from the taxpayer. Corrupt as fvck.

Eventually it will stop, at least I hope so.

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It shiuld and will be stopped, but seriously, HFT is not the reason the banks are raking it in recently. It simply doesn't account for nearly as much money as that.

AIUI, that's one abuse that won't work in London, 'cos stamp duty would cause HFT to lose far more than it could hope to cream off.

Unless they have a wheeze to avoid it ???

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Is the Singularity already happening at Goldman Sachs?

Yes. I know some of you slam me for posting this stuff, but read it and just understand that you haven't a chance as an amateur investor.

What is happening here is 'front running' the trade. These kunts are scooping fractions of a penny off of every trade, but to the tune of a few hundred million dollars a day, in an 'the office' vein. It is illegal in any sense and the only reason they aren't in the slam is because they built the system and no single entity, including government, has the skill, capital, or resources to examine it and remove the corruption. FFS, you have Paulson and Geithner working as treasury secretary, who both were high ups in Vampire Squid! Coincidence? Fvck no. They just worked Bush/Obama over and guaranteed the Squid an almost unlimited 0% loan from the taxpayer. Corrupt as fvck.

Eventually it will stop, at least I hope so.

Anyone for a nice game of Chess. :lol: I've just destroyed the stock market. Stop Dave I'm afraid!

http://www.dailymotion.com/video/x4gr3z_20...-9000-part_tech

Edited by Abstra

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One wonders...how did we go from this:
(which I actually owned when I was a kid!) to this predictive super computers skimming the wealth away from the world, one penny at a time?

Sheesh.

Uhh this is so hard for me to comprehend. When I buy shares it takes days, sometimes weeks for the broker to process the deal.

How can it be processed that fast?

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Uhh this is so hard for me to comprehend. When I buy shares it takes days, sometimes weeks for the broker to process the deal.

How can it be processed that fast?

Well, when it comes time for your broker to make the trade, there is a small time gap between it being offered and accepted.

Say the brokers network and the market network have a delay of 0.100 seconds due to technology limitations. This other software operates at 0.005 seconds to the market, which could potentially trade your stock 20 times before your original order is run through.

So in that time, you have probably been shorted many times, for fractions of percentage of course, but that adds up when this software can do this for every trade in a day.

To you, well, you end up with x number of shares like you asked for, so it doesn't seem so bad. Or does it?

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I dont think this has much of an impact on amateur investors.

What amateur would trigger such an event?

Which little guy is complaining that every time they place an order of $1,400,000 they pay $7,800 too much?

The industry is skimming pennies off its own own equity traders.

It's another necessary arms race that bears a system wide net loss.

Pfff.

Might as well ban it.

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I dont think this has much of an impact on amateur investors.

What amateur would trigger such an event?

Which little guy is complaining that every time they place an order of $1,400,000 they pay $7,800 too much?

When you or I invest our money in shares or bonds, we pass under anyone's radar[1].

When a fund manager invests our pension money in the same shares or bonds, it's aggregated with thousands of others.

[1] Unless we deal in an illiquid small-cap.

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"Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed," writes the New York Times' Charles Duhigg in a front page piece that’s been the talk of the town in New York and Washington. "High-frequency trading is one answer." Duhigg writes, “High-frequency trading systems are so fast they can outsmart or outrun other investors, humans and computers alike."

What a complete load of rubbish from start to finish.

The only reason they're making so much money is the government is printing it and giving it to them.

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Its simple enough. Suppose a share is trading at 100, you place and order for 10,000 shares with a limit price of 105. My computer offers you one share at 101 and is accepted, then I offer you one at 102 and is accepted. When I hit 106 I am rejected. Thus I have discovered your price and done so in milliseconds. I then offer you the bulk of the shares at 104.99 to complete the order making you pay your maximal price. The slower traders come in and start offering at 102 which I buy to cover the shares I have just sold you at 104.99 closing the position and booking a profit.

What is needed is a time window to allow other offers to be received then selecting the best offer. An auctioneer does not sell to the first bid over the reserve.

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Richard Pryor did this first in Superman III. We need to bring back Christopher Reeve, he could sort this sh!t out.

On, Superman where are you now?

Now everything's gone wrong somehow.

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AIUI, that's one abuse that won't work in London, 'cos stamp duty would cause HFT to lose far more than it could hope to cream off.

Unless they have a wheeze to avoid it ???

No stamp if you trade as principal.

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Its not, when I was working for Tesco upto '98, we were using AI to forecast the store orders/volumes that would pass through the depots back than. This was done at Brackmills.

On the whole the AI was good but it lost its accuracy for unusual events like bank holidays, Easter & Xmas plus the weighting factor for exeptional good weather during the summer also threw it a bit as well.

Traders have been using AI since the 90's and they have just improved upon the systems exploiting most of the opportunities over time.

I'm not questioning the effectiveness of AI, just it's ability to conjure money of of thin air. At Tesco you were creating real value through efficiency savings. Goldmans aren't creating anything, just acquiring it. If all the investment banks and hedge funds are making billions each from this, someone would have noticed handing it over to them, Salami Technique or not. The reason no-one's noticed being down to the tune of several billion pounds is that the ultimate source of this money is the Fed's printing press.

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Guest sillybear2

I hate the exploitative shenanigans used by Goldman and alike, but that Irene Aldridge chic is hot so now I don't mind so much.

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Well, when it comes time for your broker to make the trade, there is a small time gap between it being offered and accepted.

Say the brokers network and the market network have a delay of 0.100 seconds due to technology limitations. This other software operates at 0.005 seconds to the market, which could potentially trade your stock 20 times before your original order is run through.

But why does this other system not also have the same 0.1 second "communications delay"?

I really can't see how this can be avoided

tim

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Well with any luck things like this will kill off the idiots who are buying shares based purely on the share price history and not actually bringing any new information to the markets. If you do your analysis, and you judge that a company is likely to make a good profit in the future which is not currently reflected in the share price, then you should buy the share. Everyone else is chancing it and will get what they deserve.

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But why does this other system not also have the same 0.1 second "communications delay"?

I really can't see how this can be avoided

tim

If you pay enough, the exchange will let you put your servers in the same building. You can then send a packet of data to their computers in well under a millisecond. It takes at least an order of magnitude longer if you do it over the Internet (and probably over two if doing so across a continent).

I remember reading somewhere that the exchange would give its favored traders a 50ms head-start, so it might be that you could get away with having your servers in the same city if it was not for the other HF traders. There is at least one company trying to shave 100s of ns off the network latency, presumably to use in a server that does not experience L2 cache misses and that cannot be moved another few tens of meters closer. They now have it down to under 5us wire-to-RAM.

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I dont think this has much of an impact on amateur investors.

What amateur would trigger such an event?

Which little guy is complaining that every time they place an order of $1,400,000 they pay $7,800 too much?

The industry is skimming pennies off its own own equity traders.

It's another necessary arms race that bears a system wide net loss.

Pfff.

Might as well ban it.

Pension funds regularly balance assets, and ultimately all money syphoned off doesn't come from nowhere.

systematic risk free arbitrage is stealing...

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9450 attempted!!!! Is either the DOW or Nikkei going to try and fill the price gaps they have before heading South forever?! :o

Good call :rolleyes:

I saw 11043 on the Nikkei last night, gap filled?

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Well, when it comes time for your broker to make the trade, there is a small time gap between it being offered and accepted.

Say the brokers network and the market network have a delay of 0.100 seconds due to technology limitations. This other software operates at 0.005 seconds to the market, which could potentially trade your stock 20 times before your original order is run through.

So in that time, you have probably been shorted many times, for fractions of percentage of course, but that adds up when this software can do this for every trade in a day.

To you, well, you end up with x number of shares like you asked for, so it doesn't seem so bad. Or does it?

Days? Unless you are buying very illiquid stocks or something on the Uzbek stock exchange, I'd get another broker or your own CREST account.

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Good call :rolleyes:

I saw 11043 on the Nikkei last night, gap filled?

More Weeeeeee this morning....

DOW 9450 = 38.2% Fibonacci retracement level.

Does this infer then that QE or not the market will fail?

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