Babylon's Bankers

ROBOTRADING: A DEBATE THAT IS NEEDED, AND SOME SPECULATIONS: PART ONE

Over the past few weeks I have been blogging and suggesting in videos (particularly in the members' area here), that we need to have a deeply rooted cultural discussion on some of the core "memes" informing our society and civilization, and among those memes, I have been suggesting in various blogs and books, is money, who it represents, and what it represents.

Concomitant with this discussion, I believe we must have a discussion on our markets, and on the desirability and necessity of computer-driven algorithmic trading, a discussion rendered all the more urgent, I believe, by the recent financial crisis, as well as by events such as this:

Latest Market Glitch Shows 'Trading Out of Control'

Let's look at those opening statements and their implications carefully, before beginning to speculate on the nature of the discussion that might be had about them:

"Wednesday morning's stock snafu had a familiar ring to it — mysterious volume in trades that simply could not have been made by a human comes surging out of nowhere, causing brief but acute market mayhem.

 

Getty Images

"By now, many players on trading floors have gotten used to the disruptions that can come from the highly automated new world of high-frequency trading.

"But that doesn't mean they like it."'This algorithmic trading is kind of out of control,' Phil Silverman, managing partner at Kingsview Capital, said as officials at the New York Stock Exchange tried to make sense of what happened. 'It seriously hurts investor confidence.'"

We can readily understand, from the point of view of brokers or bankers, why such algorithmic trading would be beneficial, for money is allowed to work at speeds not dependent upon human communications. In short, such trading effectively allows the expansion of the money supply without, so to speak, having to expand the money supply.

But the article touches on the inherent problem as well: such trades are only as good as the programming int the computers making the trades, and in such instances, the algorithm can trigger incomprehensible moves that are not reflective of market reality, and in the final analysis, markets are very human things, and unrealistic reflections of market conditions can thus inhibit, rather then encourage, genuinely human investments.

The questions that would seem to be a necessary part of the discussion that isnot occurring here would thus seem to be:

  1. Should such trading be allowed at all, and if so, should it be regulated or not?
  2. If unregulated, and if a "glitch" in the programming causes unrealistic rises or falls in certain segments of a market, with catastrophic results for human society at large, are such trades indeed legitimate, or should they be subject to nullification?
  3. More importantly, it is conceivable that the broker, in the standard sense, will eventually (if indeed, he has not already become) obsolete, a mere enterer of orders in a program. Should such a fully automated market be encouraged or allowed? and if not, why not?
  4. What standards, if any, are in place for the design, and designers, of such programs? Should such private and proprietary programs be public knowledge, or under what circumstances should such proprietary programs become subject to public scrutiny?

And so on. The last question really highlights the nature of the problem, for trading programs are proprietary information. But when that prioprietary information has an effect that could conceivably spill over with beneficial or catastrophic results for human society, should they then remain so?

These are discussions and types of questions that, by and large, were shelved and tabled during the era that computers and electronics increasingly took over market trading operations, and with the recent  financial meltdown, they are, in my opinion increasingly necessary to public discussion, and should no longer be confined to the conference rooms and offices of corporations of agencies like the SEC.

But there are other, murkier possibilities about which we must also speculate, but those  must wait for tomorrow...

See you on the flip side...

16 thoughts on “ROBOTRADING: A DEBATE THAT IS NEEDED, AND SOME SPECULATIONS: PART ONE”

  1. Sex & money are the axis of the deepest spiritual & moral challenges from the individual to any collective value system. Even the fastest computers & the most intricate programs cannot hide the fact that nature’s laws of balance & harmony have been broken. The fruit from the tree is not sweet, actually it had no real chance to come to maturity.
    Not many have the courage to retrace the steps to find where wisdom was left for selfish interests at all levels, if ever there was ever any real wisdom to begin with. Appropriation is rarely questioned ontologically, also is not moral bankruptcy as the seed of material bankruptcy. So there is this whole dark side to economy that never practically surfaces, is never accounted for. Until it is, the financial world will never be totally integrated to organic terrestrial reality. It is remarkable to witness that all traders & investors don’t see themselves as an integral part of the economic problems sucking the lifeblood of the freedom they so want for themselves. Isn’t their activity just another name for usury?
    And it is also remarkable that any other paradigm is being imagined for sound economic investment into the building of wealth, or must we assume that it cannot exist? I believe it’s the case in the present crisis state of planetary economic panic.

  2. If we are a talking about share, bond and fixed income markets etc, then bots can be a major factor in market behaviour, however if we are talking about the Currency (Foreign Exchange) market, this is in a realm of its own completely!

    Approximately $4 trillion dollars is traded (daily) on the FX market worldwide from Monday morning Australian eastern standard time (non stop) until 5pm U.S eastern standard time on Friday – factoring in the time zone difference between Australia and the U.S we are talking in excess of 5.5 days solid non stop trading. It is well known that the FX market cannot be manipulated as other markets can be simply due to the massive volume of money traded – even central banks cannot manipulate the market for any length of time, and as for individuals, or even hedge funds, this is an impossible task.

    There are various tricks the market makers (Banks) use to assist the retail trader (us) to part with our money, but a wise and diligent retail trader will soon learn what these are and adapt his or her trading style to accommodate this trickery. Many retail traders use bots to assist them along their path to the holy grail but the banks use this to their advantage. I know of one bank here in Australia that employs a dedicated software known as the “Redback”. It is a proprietary Spider (hence the name) software that is designed to search and locate bots that are used by retail traders. The software will locate and monitor all retail bots, but will specifically flag all trades executed at $50 a pip or more.

    This market is the realm of the big banks and whilst they will glady let us play the game with them, when the big money comes on the table the bank traders soon begin to execute their bag of tricks which eventually leads to the majority of us parting with our money – but having said that, no individual bank can manipulate the market for any length of time, it is just impossible given the sheer size of the FX Market!

    1. David B. Schuster

      You could well be right, EAD, but tend to think otherwise. 4 trillion dollars in FX trades far exceeds the needs of normal business transactions. Remember Brazil talking about a tsunami of money that crushed their export sector? This volume represents the way that governments set exchange and interest rates. In the same way, they use the derivatives market to set the price of oil and other commodities. However, governments cannot engage in this activity themselves. Rather they have their agents do it, the too-big-to-fail banks. Thus, we get the incestuous relationships of modern corporatocracy.

      1. It does exceed the normal needs of day to day business, but the bulk of FX trades are highly speculative on the Interbank Market rather than transacted on a genuine commercial needs basis. I cite the example of the Japanese Tsunami that took place around 1.30pm Australian eastern standard time – the Yen skyrocketed against the USD dragging all the Yen crosses up with it. This money, was money being re-patriated back to Japan by Japanese Banks after the event took place..The Yen climbed about 600 pips or so against the USD in a matter of minutes, but the dust settled not long afterward and the market returned to its natural course.

        All markets can be subjected to manipulation but the FX Market is the least vulnerable of them. Some people also like to cite the George Soros fiasco in 1992 as a source of manipulation, but as I point out to people, that was back in 1992 and alot of things have changed since then – there are alot more players in the FX market nowadays than there were back then and alot more Central Banks in the market too..The FX Market was trading around 600,000,000 a day back in 1992, a far cry from the 4 trillion that is traded today.

        Perhaps the closest thing to any type of real manipulation (if one can call it that) is the pegging of the CHF to the EUR at approximately 1.20 EUR – the SNB have made no secret of their desire to keep their currency pegged at that rate and the IB Market knows this, however if the pooh was to hit the fan in the Swiss economy, neither the SNB or the ECB would be able to hold that price as a constant – both Central Banks would be swamped by the rest of the market.

        Perhaps we should be talking about the “real” reason why the SNB and the ECB want the CHF pegged to the the EUR – there could be a story in itself within that one lol 🙂

        1. Just to elaborate on my reference to the time it took place – 1.30pm Aust time is right in the middle of the Asian trading session for the FX Market, and hence all Japanese Banks including the BOJ were all open for business – had the Tsunami occurred in the evening (Asian time) with all Japanese Banks closed for business, we would not have seen such violent swings on the Yen that we saw that day..The BOJ was a major player in the price movement that day, but as I said, it didn’t last too long and the market soon returned to normality.

  3. I think it would be good to have some kind of middle road, e.g:

    Computers would be allowed to analyse patterns, relations, etc. .etc.
    But ONLY a human trader is allowed to place the actual trade!

    Gives time to check, reduces fake volatility, reduces market activity that faster than one can blink, reduces the insane behavior of going out of the way to get a connection to the exchange with 1 millisecond less latency than the other guy, etc. etc.

    It would also give small investors at home a more “honest” (note the quotes ;)) playing field.

  4. Johnycomelately

    “In short, such trading effectively allows the expansion of the money supply without, so to speak, having to expand the money supply.”

    Very cogent point.

    Is the increase in the velocity of money between interrelated entities staving off the inevitable deflation? Or is there a disconnect between the real economy (ordinary people) and bot trading ( global corporations).

  5. human beings at some point have to encounter this possibility
    to read is to forget
    to see is to remember
    to DO is to KNOW
    reality may be a friendlier place at close range.

  6. can you comment on the loss of more Russian satellites on proton rocket. As memory serves the Russians lost their GPS satellites back in 2010 on same vehicle. Last mars photos loss was blamed in Sabotage as was the sukhoi superset downing

  7. David B. Schuster

    So they buy and sell in large volume, making only pennies, but spread out over millions of transactions, it amounts to a lot of money. Where do these pennies and millions come from? Are they siphoned off from the productive parts of the economy, that actually make something? Or from savers, workers, and pensioners? And right now the stock market is pushing new highs! If you ask me, it looks like a mandate for inflation, to wipe out the middle class, a la agenda 21.

  8. It’s too late Joseph! The animal farm is happy with the way things are now; money for nothing and the chicks are free. At this point, only a few stray coronal mass ejections, lapping away at the festering boil, can possibly wipe away that ugly algorithmic grin and put us back on a path towards Maat.

    I think that my Hopey-Wishy feeling has completely dissipated.

    1. The solution is to avoid the middle man, and not allow that freedom of choice to a vote, to those whose only interest is a piece of the pie they have no right too thus a grand deception.

      The knowledge of deception.

      Socrates took the hemlock on that principle.

      The computers are programmed to cheat. the game is rigged.

      Look at MF Global, the game was finished…they took the money and ran, having bought off those that write the rules…..err the scripts,
      programs that Platos cave dwellers are wired into.

      as yeast to wheat creates bubbles, is as yeast to sugar creates drunken fools who invest into tulips bulb bubbles. ( another metaphor no doubt)

      1. imagine if you will, playing chess against an opponent, and he controls one of your pieces. Now imagine playing a game and a invisible opponent too each side controls pieces on both sides.

        Not a very intelligent game to play. Robert E Lee was one of those on the “payroll”.

        1. Robert Barricklow

          A game in which the rules are meant to keep you corralled, while ‘they’ are not subject to any such constraints, except in the illusion of pretence(playing by the rules/while breaking every one of them in the shadows: shadow economy/shadow govt., ect.)
          Or simply breaking them in an in-your-face, “What are you going to do about it!”, arrogance of power.

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