No Market for Real Money: Edison, HFT, and the Post-Human Stock Exchange

by Vincent Board
File under: Fake Tech22 Apr 2013 20:13 EDT

In the contemporary lexicon, "investing" is a very slippery concept. In a real sense of the term, it implies an investor, i.e. somebody who has settled upon the merits of a given venture and is willing to put capital at risk in the hopes of a profitable return. There is some deliberative human discretion involved, an actual qualitative consideration of risks, costs, and merits that can't be divined by any mere algorithm.

This all relies on some sense of executive judgment on the part of the investor, and some discernable merit on the part of the venture being considered. Living in Fakenation, where Yahoo is still a company and Hollywood films without plots command mult-million dollar budgets, "investing" has obviously had to take on a much looser meaning. 

In fact, the latest trend on Wall Street is to simply dispense with human judgment entirely by spending massive resources developing supercomputers to trade empty financial instruments as near as possible to the speed of light, capitalizing on infinitesimal imbalances in market values to mine billions of micro-profits. 

Call it what you want, but an operation dominated by such behavior isn't a market in any sense of the word. A market is, and always will be, a community of real flesh and blood human individuals that engage in trade for mutual benefit. They may use digital platforms to engage in these trades, but we have 'markets' in which computers trade with each other, with each machine operating as if it were in a real market and not itself picking up the noise of other mechanized trades. The self-referential nature of the entire operation is totally absurd, akin to a video game, except with millions of retirement pensions in the balance. 

But thankfully even Wall Streeters have started to look past the next bonus cycle and consider the problems of high-frequency electronic trading. Never mind that the entire premise of the operation is ridiculous, and a product of an extremely short-term mentality that disregards the creation of real wealth and value. This doesn't concern them terribly much, but the increasingly likely prospect that their entire house of cards may dissolve in a frenzy of robotic trading and ruin the bottom line does get their attention. The Flash Crash of May 2010 raised many eyebrows, and more recently Google's shares inexplicably dropped over 3% before promptly rebounding almost instantaneously:

Google slid as low as $775 in two trades totaling 210 shares at 9:37 a.m. New York time and then recovered most of the loss within the same second, according to data compiled by Bloomberg. The stock had opened the session with a gain, climbing to as high as $803.96. It closed up 24 cents at $800.11 at 4 p.m. in New York.

So what is Wall Street going to do? There's only one solution, of course. Build yet another extremely massive supercomputer with another set of algorithms to regulate all the other ones! 

Meet "Edison"! He is the supercomputer that is going to watch all the little boy and girl supercomputers as they go about their trading, and predict when they are about to crash the market! Kind of like the SEC, but without all the sleazy human perverts on the staff.  

One wonders why Edison doesn't go into business for himself if he knows what the stock market is going to do. That kind of information could make him a very wealthy computer, and probably the hottest eligible bachelor to all the supercomputerettes out there.  

But Edison isn't in this for himself. How could he be, after all? The Denver Post announces his high-minded mission:

Powerful computers can wreak havoc on U.S. stock markets, creating hair-raising volatility and eroding investor confidence in the lightning-fast search for profit.

But far more powerful computers could help save it.

Mechanized trading by computers without regard for fundamentals wrecks stock markets, which are supposed to be based on the organic mechanism of price discovery. So what better way is there to fix the stock market than to set up a really, really powerful computer to track all the other ones, right?

That kind of logic may appeal to somebody that works for the SEC, but let's think this through. If there's a larger governing algorithm that stands over this whole system, and may halt trading at moments it computes to be "dangerous", then might that aspect of the market come to be written into the trading algorithms themselves, defeating the whole thing? Or, even worse, as this technology spreads to firms from regulators, as the relentless advance of computing power suggests it eventually will, won't firms just write this kind of forecasting into their own models? If all the predictive algorithms are saying that all the trading algorithms are about to crash the market, write it into the trading algorithms to sell... and crash the market! Self-fulfilling prophecy indeed... but don't worry, the nerds that waste their time on this nonsense are sure that raw processing power will overcome all these "reality" problems:

Tracking every trade, in real time, on every U.S. stock exchange? No big deal.

"That data size — we routinely do 10 times that much. Easily. It's a trivial matter," said Bailey, a leading figure in both high-performance scientific computing and computational mathematics.

Everybody with the slightest bit of skepticism and life experience in finance knows that anybody that tells you that they can predict a market with perfect precision is lying. And it isn't just a computational problem. Markets are inhabited by people, and even fake electronic markets are still coded by people. Nobody can predict with precision the future social behavior of somebody they know very intimately, say their own children, much less the ebbs and tides of a mass social organism like a market. You can certainly sketch out broad trends and outlines, but the claim that is made of Edison is that he can predict a particular crash at a particular moment. How? Because he's got a really big processor. Size is all that matters— computer nerd compensation, perhaps?

Unfortunately, these absurd business practices are defended by some of the people who claim to represent "free markets", and to even give them a philosophical justification. Listen to Yaron Brook of the Ayn Rand Institute shill for this high-tech shell game:

Yaron claims to be trying to provide a philosophical justification for markets in these videos, but this perspective of his is entirely unphilosophical and uncritical, and is just more unfortunate right-wing apologia for entirely fake "free" markets. 

A real philosopher would understand that human judgments about value are the real basis for any market. "Investing" implies a commitment to a particular venture across the long term, something entirely lacking in the short-term Viking raider markets in which discretion is so shallow it can be computerized. These banks want to trade like machines, without taking the responsibility of thinking about the fundamentals of what's being traded. It's an entirely short-term strategy speciously justified by empty appeals to "efficiency", and one that would frankly horrify Ayn Rand, who always took care to stress that real capitalism rewards long-term thinking, while rigged markets like our current one only reward the frauds who are so often the common leftist bogeymen.

But Yaron and all the vulgar libertarians of his ilk are just encouraging a system of fake markets, ensuring that 'capitalism' will be blamed for the next crash. Perhaps he would do well to read a quotation from the woman whose ideas he claims to advocate:

If devotion to truth is the hallmark of morality, then there is no greater, nobler, more heroic form of devotion than the act of a man who assumes the responsibility of thinking.- Ayn Rand

Our business executives, by contrast, have gone to extreme lengths to profit from the most cheap, thoughtless, circular scams like the current stock market. If they're too lazy, timid, and uncreative to invest in real enterprises, and think that a supercomputer can keep their artificially inflated markets from crashing (perish the thought of a market dropping!),let them have it. Real value will be created by those that don't rely on mathematical proxies for their own minds. 

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Anonymous says:15 Aug 2013 14:42 EDT
"an operation dominated by such behavior isn't a market in any sense of the word"

Why? It may upset the day trader on a day-to-day basis, throwing the value of their chosen company to unreasonable numbers, but for the long term investor (real flesh and blood as you say),it has no effect on the real reasons why the investor purchased the company. Ultimately the value expected by the investor will either be realized or not, same as before. HFT adds volatility (which is an issue worthy of concern),but shouldn't change long-term values. The market essentially becomes 2-speed. One for the card counting robots, and one for the real investor.

Yes the card counting robots suck value out of the system with zero production. But they don't fundamentally negate the market as you imply.
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