Most of us have experienced PMT, either first hand if you belong to the fairer sex, or vicariously through a loved one if you don't, but when it comes to HFT, the majority of either sex are probably using that other 3 letter acronym WTF?
For those of you unfamiliar with HFT (high frequency trading) you might want to alter that state of ignorance 'tout suite' ( as our cheese fondling brethren across the Channel might say). Why? Well something has just happened that demonstrates just how fragile and exposed the stock market is to rogue algorithms, these are a bit like Rogue Trooper but far more destructive.
HFT virgin? No problem. Pop your own cherry by having a look at this. Kevin Slavin's brilliant TED lecture concludes that "We are now writing code that we can't understand, with implications we can't control". As I say in OUCH! Who could have seen that coming?
Well obviously Kevin is one, and the other 'one' is the 1 million plus viewers who have watched it. So when this all goes horribly wrong and some numpty appears declaring it to be a black swan event - the rest of us will know better.
Let's get into the nitty gritty and take Slavin's observation one step further. We might be writing code that we can't control but we are also writing code we can. The problem being the motivation behind it isn't necessarily benign as we have seen with the Stuxnet worm. The New York Times reported on 24th June 2012 that Stuxnet was deployed by the US and Israeli intelligence services to target the Iranian nuclear programme. Clearly a genius move as no-one will ever consider writing one that targets the instigators instead, right?
But let's move on from alleged politically driven cyber espionage to your personal savings. Got anything invested in the stock market? You might want to re-think that cunning plan given what's just happened to Knight Capital. As usual, Zerohedge coughs up the beans allowing us to see what happens in practice when there is 'trouble at t' algorithm mill'.
Many claim 'buy low and sell high' is the first, simplest and best mantra for investment. So when an algorithm goes rogue and does exactly the opposite you have what is often referred to as a 'minor inconvenience'. Except what happens when those trades are being enacted every millisecond and you are losing money on every one? Your minor inconvenience has just switched to an instrument of financial torture and in extreme cases potential company insolvency. So if all this is eminently possible, and with Knight Capital we have just seen the minus $440 Million practical play out of it, what is to stop anyone writing malicious code in order to manufacture these situations? Well no-one gets involved in that sort of behaviour do they?
The solution of course is to stop all the HFT nonsense either by applying a minimum time limit to all trades or applying a tax per trade so the frequency element is penalised. Will this happen in advance of any disaster? Unlikely. We generally need a cataclysmic event to shift the mindset. Are we human, or are we dancer? The puppeteers are in town - you might want to bear that in mind and check your pockets.
No comments:
Post a Comment