Calculated Stupidity

Thursday, October 25, 2012

Yesterday TMM were tripped into thinking about the complexity of algorithms and their place in this world against old fashioned humanness.

 This subject quickly emerged in our chats with respect to markets, with most of TMM expressing the opinion that none of  them had an intelligent thought to express today. This then led to the observation that there was little point in having an intelligent thought as this year has seen supposedly intelligent process regularly run down by algos anyway. So perhaps the non-clever clever thing to do instead, to counter the algos, would be to put on trades that are so unimaginably stupid on conventional levels they may just be stupid enough not to be sniffed out by the clever bots. "That'll fool em !"

Which led us to consider the background issue of the European Parliament and their budget process - Could it be that they've been using this method of "so stupid it may just work" for years?

 But back to High Frequency models. Though TMM have found themselves run over by them in the past, we don't feel it fit to complain other than about ourselves as we are not evolving fast enough to anticipate the "thought" processes of this type of player that now sits at the poker table of markets. TMM do not think the answer is to ban them from the casino just because they win at other people's expense but to learn and adapt. TMM simplistically think that if algos are causing distortions in markets that move prices to places they really shouldn't be on your own measure of value, then you should celebrate the opportunity they give you (even in flash crashes) not curse them.  If however your view is that they are terrible because once you own the position they push prices through your stop loss, then really you do have to get a grip on what markets are. If someone owns a share then they should be allowed to sell it for whatever reason they like, whether you agree with their method of analysis or not. That's just how it is. If we start stipulating the methods of investment process a fund manager has, or even day punters, then you might as well fix prices daily at a committee made up of members who have elected themselves as spokespeople to represent only their own views over those of a huge disparate seething mass of differing opinions.

Oh good Lord. No! It can't be that we have just described the EU Parliament and their budget process again, could it?

But HF algos weren't actually the trigger to this debate, it was started by the problems we humans have now convincing computers that we are humans and not other computers. Most web pages insist on the user going through some sort of test. It started fairly easily with typing in the clear letters displayed in a box, but now one has to squint through reading glasses at a blurry picture of someone's door number and then untangle a ball of string to pick out the letters of a word that isn't a word. It's a nightmare. Even persuading a bank telephone service that you are a) human and b) not a human criminal mastermind is equally challenging. Don't they realise that they are creating, through Darwinian selection, a process that will ensure that only algos will ultimately be able to pass these tests?

  If computers are so so smart these days, then TMM suggest that instead of trying to prove our humanity through higher intellect we should switch tactic and instead prove our humanity through our stupidity. 

"Can we have the 3rd, 75th, and 125th Cyrillic characters from the original Tolstoy novel we gave you to read when you opened this account followed by the hash key?"

" I never saw Toy Story and what the f is a hash key? Just gimme my balance you f'in stupid machine" 

"Thank you we have identified you as human, we will now connect you with another human who will be able to understand your low level intellect"

 " XXXX off"

Or just stick a "please use other door" sticker on the only opening door of a pair. That should keep the bots out but let most of humanity in.

Or perhaps we should just go short of usd/jpy.

Posted by Polemic at 1:39 PM  


From what I hear high frequency is not that high anymore, holding period in FX is increasing form fractions of a second to tens of minutes. The whole idea of algorithm trading is overblown by people who just don't understand how it works and are justifiably scared to be extinct in a few years / decades. It would be curious to see EU and the rest of the world budget proposals to be back tested by algorithms. Nick

Anonymous said...
2:00 PM  

turnkey rentalSlowly, but surely, the foreclosure crisis seems to be abating rental properties .c

mamunsultanpur3 said...
2:08 PM  

"TMM simplistically think that if algos are causing distortions in markets that move prices to places they really shouldn't be on your own measure of value, then you should celebrate the opportunity they give you (even in flash crashes) not curse them."

Could I cross-out 'algos' and insert 'central banks' - or would that lead to banishment in the purgatory that is Zero Hedge?

SteveH said...
2:25 PM  

as a reformed scalper my experiences with HF trading are jaded and the games that are played intra day and with for those players/fund where large orders need to be filled are real, but for the average investor I dont think HFT really does much harm

The real problem is intertwined with the speed of newsflow, information, fast money and volatility.

Here is an example of the broader problem I see. The markets have this tendency to have very low vol and then regime change switch into high vol very quickly. In those switching periods, people get run over really quick and therefore once they happen many just stay away, waiting for some signal. The algo's then take over (or do as they are supposed to do and push the market to the extreme) and b/c PIN, even less are willing to don the kevlar.

Even though we joke about PIN, in the real world there are stop losses and people do re-evaluate their opinions when prices are 25% lower than their purchase price in 2 weeks. Maybe I did miss something?

it is what it is and its not going back anytime soon. but the loser in all of this I think is fast money. Not content to eat the lunch of the pensions and slow mutual funds, they are now cannibalising themselves.

btw, keep up the great work TMM, always a pleasure to read

abee crombie said...
2:42 PM  

"...but now one has to squint through reading glasses at a blurry picture of someone's door number and then untangle a ball of string to pick out the letters of a word that isn't a word..."

Loved the imagery such as the above. Thanks for that; first time I have actually laughed out loud in front of my computer screen in a while.


Anonymous said...
3:12 PM  

That second paragraph was pure Douglas Adams - marvellous

Anonymous said...
3:31 PM  

C Says'
HFT is irrelevant. The tech hedge like all such hedges only exists until it is arbed itself by the increasing numbers using it. They then eat each other.
It's no accident that many large hedge funds have gone from outperform to the opposite as more, and more hedge funds came into existence. This is the very nature of how commercial opportunities arise,get exploited and then get nullified.

Anonymous said...
3:35 PM  

LB sincerely wishes that the robots who write the screechy headlines for the financial media would just fall off the fiscal cliff today....

In truth we are probably going to have a series of endless Mr Whippy days like today where DX runs up and down between 80.05 and 79.70 (with associated market moves) until the bloody election is finally over.....

Leftback said...
5:19 PM  

a related point. From my vantage, it seems the Hedge funds who have been hedging this year, as last year, are the ones getting killed. Lazy real money doing well. HFT is killing the hedgers!

abee crombie said...
5:31 PM  

It's always hard to know what really big Real Money is doing, as they usually don't talk to media, or in the case of certain highly over-exposed prognosticators [e.g. Michael Gayed of Pension Partners], seem to reverse their positions approximately once every half hour. Perhaps he should be in an HFT shop.... LB has a severe case of Gayed fatigue. Please just STFU until after the election, or after DX actually moves by more than 0.5% in a day. Pass the duct tape, TMM....

Leftback said...
5:52 PM  

Why would anybody expect there to be returns? There's more money chasing yield than is being invested in the real economy. Tail can only wag dog for so long.

The scary thought is that the marginal returns from the evolution of 19th century discoveries are approaching a very low number. (Apologies to iPhone gurus)

Charles Butler said...
6:58 PM  

I'm feeling a bit guilty now Polemic Paine (or fellow 'twin').

I think Tinypic have it right. They do similar as you to screen out robots, but you can just key in any old rubbish and it works (as long as you are still logged in). Confuses the hell out of the bots who just give up.

Hotairmail said...
7:04 PM  

Charles, hence the point often made in this very place: fiscal crackdown on assets to fund tax cuts for "activity".

Obviously, and regardless of our earlier boomer debate, the largest (and growing) demo is longer and longer of assets and shorter and shorter activity (C would argue flat but the point remains). They're not voting themselves out of those hard earned paper gains so what then?

Dee Dee Humberside said...
8:14 PM  


Lots of ways to get to the same conclusion. In my local disaster zone, I'd dedicate the proceeds of the tax to fund social security and then lower the retirement age a few years. Would get the spenders into the labour force and the hoarders out. Instead, they've decided to raise it to 67 years. Only benefits those that the luck of a birth date made into winners, much as the may whine about it.

It's not just the 1 percent. It's a whole generation.

Charles Butler said...
10:42 PM  

Watching the market today's just the same monotonous end of day analysis of late which brings amps to his favorite indicator " FUCK YOU INDICATOR" it's signal has told him to take the rest of the year off..what is it saying

Fuck new york , fuck you banks....

amplitudeinthehouse said...
2:31 AM  

Anyone feel passionate about the Yen (one way or the other) right about here?

Anonymous said...
4:46 PM  

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