Against the "Thinking Machines"

By Razib Khan | May 25, 2011 1:08 am

Steve Hsu points me to this essay which discusses ‘high-frequency trading’, How to Make Money in Microseconds. This might elicit a takfir from my friends at the Singularity Institute, but that piece makes me less ill-disposed to a Butlerian Jihad. A lot of this stuff on the margins and frontiers of finance reminds me of intragenomic conflict or cancer; entities and phenomena which are generally proposed to serve as means toward particular ends develop their own internal logic and ends through a co-evolutionary “arms race” in their own domains.

CATEGORIZED UNDER: Economics
MORE ABOUT: Finance
  • Neil

    Hooray for Dune references. I have nothing else of value to add at this time.

  • John Emerson

    While complex and tightly coupled systems can’t be controlled, my bet is that they can be damped. One suggestion in 1987 (when a near-crash was blamed on computerized trading) was to institute a small transaction fee which would discourage high-volume short-term trading and also discourage day-trading. Damping in my experience is unsophisticated, sort of like bludgeoning or suffocating.

    Sophistications in the financial system (including complexification and tightening of coupling) which have hypothetical advantages and unknown risks probably appeal most to gamblers, since the first person to figure the system out gets a huge windfall.

  • http://washparkprophet.blogspot.com ohwilleke

    Economist Rajiv Sethi like to think in terms of trading models where there is a phase transition between trading models based upon trading activity itself (sometimes called “technical” models) and trading models based upon bringing information from the outside world about investment fundamentals into stock market decision making. The larger the share of the market that is driven by technical models or autopilot rules (e.g. index funds), the less stable that regime becomes until it collapses and traders who trade based upon fundamentals once again become prominent.

    From a securities law perspective, the key line is between algorhythms that merely react to what others are doing in the market and pre-empt them, and algorhythms that affirmatively try to screw up competitors into taking actions and then reap a benefit from that. The latter probably amounts to “market manipulation” which is forbidden by federal law subject to various safe harbors (e.g. for market makers).

    A classic old school market manipulation schemes would include planting a false news story to drive down the market, buy lots of stock, and then sell when the story was discovered to be false, or artificially controlling both sides of a fake bidding war until you cashed out from a third party at a high price.

  • Brian Too

    Count me as a major skeptic of arbitrage trading. The “value added” of these alleged market geniuses amounts, solely and entirely, to being able to push the big red Trade button before someone else does.

    Their marketing secret sauce consists of milliseconds to nanoseconds. As such their business model can disappear just as swiftly. I’ve read about these outfits. They get systems hosted physically close to the bourse computers. They are so paranoid about protecting that razor thin time to market advantage, that the hosting companies have to measure the patch cables. To make sure that they are all exactly the same length, even if they have to coil 100 feet of extra cable uselessly behind some of the servers!

    This is just another bad idea from the geniuses who brought us sub-prime mortgages.

  • cerebus

    Vile Offspring.

    “the lifecycle of a civilization like the Vile Offspring ends with the superintelligent transcendent entities being consumed by their own out of control capitalistic corporate instruments”

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About Razib Khan

I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. In relation to nationality I'm a American Northwesterner, in politics I'm a reactionary, and as for religion I have none (I'm an atheist). If you want to know more, see the links at http://www.razib.com

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