The disconnect between genuine human market activity and that created by machines proceeds apace, for JP Morgan has just launched a new algorithmic high frequency trading algorithm, as this article from Zero Hedge, spotted and shared by Mr. B.H., states:
The motivation, as usual, is the "bottom line," and maximizing profits while minimizing costly (human) labor overhead:
In the latest victory for robot kind over humans, LOXM’s job will be to execute client orders with maximum speed at the best price, "using lessons it has learnt from billions of past trades — both real and simulated — to tackle problems such as how best to offload big equity stakes without moving market prices."
In other words, one giant "big data" aggregator, using historical precedent to guide future decisions, which coming in a time when "this time it's certainly different" for the broader stock market, could be a big mistake.
“Such customisation was previously implemented by humans, but now the AI machine is able to do it on a much larger and more efficient scale,” said David Fellah, of JPMorgan’s European Equity Quant Research team. Mr Ciment said that, so far, the European trials showed that the pricing achieved by LOXM was “significantly better” than its benchmark.
The development guarantees another round of downsizing among bank front offices as increasingly inefficient human traders are removes from the equation... and payroll. As the FT notes, investment banks have been increasingly using AI, automation and robotics to help cut costs and eliminate time-consuming routine work. "For example, UBS’s recent deployment of AI to deal with client post-trade allocation requests, which saves as much as 45 minutes of human labour per task. UBS has also brought in AI to help clients trade volatility." (Italicized emphasis added)
It's precisely that italicized phrase (which I have emphasized) that caught my attention in this article, as the reader might well imagine, for "tackling problems such as how best to offload big equity stakes without moving market prices" has been, I submit, one of the major problems with high frequency trading algorithms, as exemplified by the various "flash crashes" that occur from time to time, beginning with the infamous May 2010 flash crash. The problem, of course, has been that these algorithms can, and have, "run amok", and caused market value of certain equities or commodities either to dramatically rise, or fall, within mere seconds, forcing shut downs of markets and price "resets," as I have blogged here before. The problem, as I saw it then, and still see it, is that these "resets" are costly, and will inevitably involve humans and human activity, and that, of course, adds to overhead costs.
But now, supposedly, JP Morgan has waved a magic wand of code, and one can now "offload big equity stakes without moving market prices." Let that one sink in for a moment... "big equity stakes" can be "offloaded" without any effect on market prices!?!? Since when?!? The sentence, I submit, is a stunning admission of just how artificial, and unreal, these markets have become under trading algorithms. If prices are not affected by "offloading big equity stakes," then one of the key mechanisms by which humans determine their investment decisions - the price of an equity itself within market movement - no longer is reflective of anything humanly real. I don't know about you, but I don't want to invest my paltry $100 in a share of Twisted Trading Algorithm Partners, Inc. when the price itself is being determined in part by an algorithm that will allow JP Morgan to dump, or buy, vast blocks of Twisted Trading (NASQUACK symbol, TT) without "moving market prices." Yes, that means I'd personally really rather have human traders on a floor waving papers and shouting hysterically at each other to conclude trades. And yes, I'll take a physical copy of that 1 share of Twisted Trading's stock, thank you very much.
Thank goodness sanity reigns somewhere, for Zero Hedge captures my own concerns with the vast expansion of "dark pools" and high frequency trading algorithms:
PM also said it had no risk management issues with the technology. “The machine is restricted in its trading behaviour, as it learns under, and operates within, our general electronic trading risk framework, which is overseen by internal control groups and validated by regulators,” Mr Fellah said.
Of course, with such rapid propagation of technology among both stock investing and trade processing, it is only a matter of time before a "black hat" hack takes place, and sends trading - and markets - haywire. Which, incidentally, may be among the reasons for the concerted push: after all what better way to avoid blame for what is coming than to blame it on, who else, Russian hackers.(Italicized emphasis added)
There you have the problem clearly stated. And I cannot improve on it.
See you on the flip side...