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Businesses Math The Almighty Buck

Sudden Demand For Logicians On Wall Street 525

Posted by samzenpus
from the most-popular-guy-on-the-floor dept.
An anonymous reader writes "In an unexpected development for the depressed market for mathematical logicians, Wall Street has begun quietly and aggressively recruiting proof theorists and recursion theorists for their expertise in applying ordinal notations and ordinal collapsing functions to high-frequency algorithmic trading. Ordinal notations, which specify sequences of ordinal numbers of ever increasing complexity, are being used by elite trading operations to parameterize families of trading strategies of breathtaking sophistication. The monetary advantage of the current strategy is rapidly exhausted after a lifetime of approximately four seconds — an eternity for a machine, but barely enough time for a human to begin to comprehend what happened. The algorithm then switches to another trading strategy of higher ordinal rank, and uses this for a few seconds on one or more electronic exchanges, and so on, while opponent algorithms attempt the same maneuvers, risking billions of dollars in the process."
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Sudden Demand For Logicians On Wall Street

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  • Well at least... (Score:5, Interesting)

    by ls671 (1122017) * on Thursday May 27, 2010 @01:46AM (#32358324) Homepage

    Well at least, they seem to start to realize that perpetual growth is impossible to achieve in a finite universe. For us, right now, this means our planet.

    We may need to start businesses on other planets until we have conquered the whole universe in order to maintain the illusion that perpetual growth is possible.

    Yet, the whole point of investing in the market is more or less (at least it was traditionally) based on a perpetual growth principle where there would always be new markets to conquer thus, rising stocks on average and a perpetually growing economy.

    Since they seem to begin to realize that perpetual growth is impossible and that trading is what they have done all their life, they need to keep the profits coming in anyway. So they figured that by using "high-frequency algorithmic trading" they could keep the profits coming in.

    Well, at the expense of whom ? How long can this trend be maintained before major problems arise in the economy ?

    • by serps (517783) on Thursday May 27, 2010 @01:51AM (#32358352) Homepage

      How long can this trend be maintained before major problems arise in the economy ?

      before problems arise? Have you not been paying attention for the last two years?

      • by Cryacin (657549)

        We may need to start businesses on other planets until we have conquered the whole universe in order to maintain the illusion that perpetual growth is possible.

        If that were possible, then there would be quite a while to go before we'd consume everything. And then, depending on your religion on the universe, either you'd keep expanding forever, or crunch in the greatest market correction of all time.

      • by HishamMuhammad (553916) on Thursday May 27, 2010 @02:27AM (#32358546) Homepage Journal

        Those of us in the rest of the world, who have been suffering being the weaker part in the worldwide marketplace game, we've been paying attention for much longer than two years.

      • Re: (Score:3, Insightful)

        by SpaceLifeForm (228190)

        Have you not been paying attention the last 40 years?

        This is all about having an excuse for their machinations.

        They will blame the geeks in court.

        • by TheLink (130905) on Thursday May 27, 2010 @04:59AM (#32359310) Journal

          It's also about marketing, bullshit and "plausible deniability".

          This is so the gamblers can give better excuses/bullshit for gambling with other people's money. This way everyone can say it's some sophisticated stuff that few people understand, so they get to keep their bonuses and profits when it all blows up.

          Here's an analogy: the financial system is a casino. The casino doesn't produce any "real" wealth - it just distributes it. The Federal Reserve produces the casino chips (trillions of them if necessary). The casino operators take their cuts+fees. The players gamble with OTHER people's money (pension funds etc), and when they win they get pay raises and bonuses. If a single gambler loses big, he loses his job. If a huge bunch of gamblers lose big, they say "bail us out". How can a huge bunch of gamblers lose at the same time? They can if they play a "let's create fake wealth" game.

          Here's a popular version: you start with a "parcel". You sell it for a profit to the next person. And the next person may do the same thing and so on. Whoever currently holding the parcel is allowed to declare that they are richer by the current "outside" value of the parcel. When the "music stops" the parcel is opened and the holder gets whatever is inside (which may be a bunch of IOUs).

          It doesn't really need very much sophistication to play such games.

          Here's another game: this is a trading/auction game: a few players pay the casino a special amount and they then get to see other people's bids 30 milliseconds[1] before everyone else does and they also get to make bids and cancel their bids rapidly. Naturally this is very profitable for those few players, unless there is a bug in their software, and they make a big loss in which case they ask the casino to rollback the trades, or change the rules so their losses are limited.

          This needs a bit more sophistication if you are aiming for maximum profit since your program has to "battle" the other programs. But the few with the 30 millisecond advantage should make money from the rest.

          Lastly, the gamblers who get sacked for losing will often get rehired since even if their companies lose big and maybe even go bankrupt, they make their _bosses_ rich.

          [1] http://www.nytimes.com/2009/07/24/business/24trading.html [nytimes.com]

          Simplified version of how it works:
          http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html [nytimes.com]

          • Re: (Score:3, Interesting)

            by radtea (464814)

            The casino doesn't produce any "real" wealth - it just distributes it.

            Sorry, stopped reading at that point, as your ignorance of economics is obviously profound. How wealth is distributed has an enormous effect on a society's ability to produce new wealth. Many dirt-poor native tribes in Canada, for example, are "wealthy" on paper, but the ordinary people have no access to that money, only the band council does. A financial system that allowed ordinary people access to that money would make everyone but a few assholes at the top enormously richer.

            Likewise, systems that att

          • Re:Well at least... (Score:4, Interesting)

            by Anonymous Coward on Thursday May 27, 2010 @11:20AM (#32362622)
            I recently worked as a developer writing exchange gateways for a high frequency trading firm that traded with their own money, not other people's.

            They were designated as a Market Maker, and their supposed purpose was to provide quotes on financial instruments.

            Theoretically, the price for the same instrument should be the same on all exchanges, but in reality, there is lag. So, this company would pay for the fastest possible connection to each of the markets, and then sit and watch. Although What their real bread and butter was arbitrage, and they have automated systems that take advantage of lag between updates of the same instrument (usually derivatives) on different markets.

            Basically, they'd see an instrument raise a fraction of a cent on one exchange, and they'd then buy a TON of it on another exchange and sell it back to the first exchange, all within a few milliseconds. Dumping all this would then cause the price to drop on the exchange they just sold it on, because the buy they executed on the second exchange would sometimes take a while to get back to the first exchange. Once all this instability started happening, it'd spur other people to start buying and selling - and they'd have an even greater opportunity to take advantage...

            The whole system was very "clever" - but completely devoid of adding any real value to the market.

            The company was investigated for some criminal behavior, but because they were very careful not to break the letter of the law in what they were doing - the law couldn't touch them.

            I could give more details, but I'm afraid I've already said too much - because I certainly do not want to be identified by the company for fear of some kind of retaliation, either above or below the table

      • Not again?! (Score:3, Insightful)

        by crovira (10242)

        Look for these very mechanisms to be banned by congress, the senate and possibly by presidential decree as the kind of "wealth creation without effort but strictly through gaming the system" which led us down the same path that derivatives did.

        All of the gains were wiped out and everybody but the insiders got stuck with the multi-trillion dollar tab when the music stopped and we found out the chairs were rented and had all be repossessed.

        These are the kinds of games which should be outlawed.

    • by feepness (543479) on Thursday May 27, 2010 @01:52AM (#32358356) Homepage

      Well, at the expense of whom?

      Currently, other traders with less sophisticated algorithms.

      How long can this trend be maintained before major problems arise in the economy ?

      Until they start gets jobs as Secretary of the Treasury and writing laws that distort markets in their favor at the expense of everyone.

    • Re: (Score:3, Insightful)

      by Z34107 (925136)

      But everything thus far shows us that perpetual growth is possible. Technology is a wonderful thing - each year we're able to do more with less.

      That's not to say that a lot of what goes on in the market isn't pure, unadulterated bullshit, but real, honest-to-goodness "growth" won't stop until technology does.

      • by ls671 (1122017) * on Thursday May 27, 2010 @02:04AM (#32358410) Homepage

        > Technology is a wonderful thing - each year we're able to do more with less.

        A perpetually growing economy usually involves the average wage rising so average people can buy more stuff while still working less.

        Have you looked around lately ? In fact you are right in some way: every year we need less people, so by the market rule, the average wage goes down relatively to what you can buy for a dollar on average, especially food and lodging.

        • Re:Well at least... (Score:5, Interesting)

          by sqrt(2) (786011) on Thursday May 27, 2010 @02:16AM (#32358488) Journal

          And bullshit like high frequency trading (really the entire concept of trading in derivatives, I hesitate to say the entire stock market in general because at its core there is something useful) only makes things worse - and at a faster rate. Every year a bit of wealth from every person in the lower 90% is siphoned off by traders and bankers and given to the top 10% or less. Over the decades a self reinforcing, self perpetuating system has been created, linked with government apparatuses that give it the appearance of legitimacy; this system rewards people who produce nothing of value, make nothing, enrich no one's lives, do not create art, do not expand the sphere of human knowledge, and provide no meaningful service to humanity or the country.

          When it's possible to get rich just managing other people's capital and skimming off the top then the way we organize our economy is broken. This house of cards cannot stand forever when you stack more and more of those people on top of the working class, the foundation, that actually produces wealth and knowledge.

          • by SupremoMan (912191) on Thursday May 27, 2010 @02:40AM (#32358618)

            But wealth trickles down! That's why we need to lower taxes!

            Disclaimer: That's a funny, not a troll.

          • by Jah-Wren Ryel (80510) on Thursday May 27, 2010 @02:47AM (#32358656)

            this system rewards people who produce nothing of value, make nothing, enrich no one's lives, do not create art, do not expand the sphere of human knowledge, and provide no meaningful service to humanity or the country.

            If only it were so simple. Efficient allocation of capital is extremely useful. It enables all kinds of progressive development that would never occur otherwise and stock markets (and derivative markets) are the best way humanity has come up with to do it. You might as well be arguing that farmers' markets and cattle auctions are just as useless - all they do is provide a meeting place and a means to buy and sell - they create nothing.

            It should come as no surprise that the system can and is abused - that's pretty much the case for every system man has ever come up with. But to argue that capital markets are nothing more than siphons from the poor to the rich is to throw the baby out with the bath water.

            • by ppanon (16583) on Thursday May 27, 2010 @03:45AM (#32359014) Homepage Journal

              Efficient allocation of capital is extremely useful. It enables all kinds of progressive development that would never occur otherwise and stock markets (and derivative markets) are the best way humanity has come up with to do it.

              Stock markets for efficient allocation of capital, sure. Derivative markets, that's questionable, and in some cases downright laughable.

              • Re:Well at least... (Score:4, Informative)

                by stygianguest (828258) on Thursday May 27, 2010 @04:23AM (#32359184)

                Stock markets for efficient allocation of capital, sure. Derivative markets, that's questionable, and in some cases downright laughable.

                There are many different kinds of derivatives. Some of them are very useful. For example, futures [wikipedia.org] are very useful in farming where it gives relatively small producers a way to insure themselves agains e.g. bad weather.

                That said, contracts that would now be called futures played a big part in the tulip market crash in 1637. But they needn't be bad, just because they can be abused

          • by Cordath (581672) on Thursday May 27, 2010 @03:13AM (#32358840)

            Margaret Atwood once described civilization as the judicious trading of "freedoms to" for "freedom from". e.g. You trade the freedom to murder anyone you like for freedom from being murdered yourself. While a rather distressingly large percentage of Americans would scream "COMMIE PINKO!!!" at me for daring to suggest this, I feel that the stock markets could stand to be civilized a tad.

            What is the purpose of the stock markets? Are they meant to be a video game played by A.I.'s for big cash prizes, or a way of facilitating investment and trade? It's time to find ways of restricting high frequency traders. While cumbersome regulations are one option, perhaps a per-trade tax or user-fee would be better. A tiny one, percentage wise, that will only have a significant impact on high frequency traders. Cuts to other taxes could be made to offset them for average frequency traders and perhaps even benefit low frequency traders.

            There are, naturally, many other ways to approach this. All it takes is resolve and, in the U.S. at least, thick skin.

            • Re: (Score:3, Funny)

              by RulerOf (975607)

              What is the purpose of the stock markets? Are they meant to be a video game played by A.I.'s for big cash prizes, or a way of facilitating investment and trade?

              Well, everybody knows that the botters and the Chinese are the richest players, next of course to the American folks that exploit them ;-)

          • Re:Well at least... (Score:5, Interesting)

            by alfredos (1694270) on Thursday May 27, 2010 @03:36AM (#32358980)

            I subscribe that and add that the stock value concept is indeed useful but has been twisted beyond recognition. If I try to think about it with a clean sheet, I can't find a real reason why a company that manufactures screws is worth 10% more at noon than at 9 am and then 10% less at market close.

            The company in my example behaves like most companies. They are going to open the next day and sell a bit more or a bit less, manufacture about the foreseen number of screws, some employees are going to get hired, others fired, others retire... Yet the swing in value of the whole company is based around news and rumours. Traders will "discount" this or that news on stock price of our happy screw manufacturer without even bothering about the steel stock or last month's sales. Some will buy stock and make a profit by noon if they are lucky, or loss at close if unlucky.

            Now, what does all this have to do with manufacturing screws? Isn't there much more in common with Casino Royale than with industry and people building things and making a living out of creating something of value?

            I attended a conference two years ago where an accountant explained that the concept of stock worth is fatally wounded. His theory, which I also agree wholeheartedly, is that stock should benefit the stockholder with dividends, i.e., with the net value generated by the company's activity. Not by the increase in the value of stock itself in the short term. Now there is a place for investors, he also said, who invest in stock and sell the stock. But that kind of operations ought to be separated by months or years, when actually the stock reflects the increase in the value of the company. Not by minutes, when the increase in value is nothing more than a throw of dice, even if you attach fancy and serious names to it.

            • Re: (Score:3, Insightful)

              by u38cg (607297)
              The reason price fluctuates throughout the day is not internal to the company, but external. The price at any moment is fixed by supply and demand, and the demand for a particular stock is driven by any number of things: commodities prices, a presidential election in Brazil, long term weather forecasts, portfolio rebalancing, performance of a related stock, etc. All of these things take place within a network, where A affects B affects C affects D affects A.
              • Re:Well at least... (Score:4, Interesting)

                by DerekLyons (302214) <fairwater@gmail. c o m> on Thursday May 27, 2010 @11:09AM (#32362428) Homepage

                The reason price fluctuates throughout the day is not internal to the company, but external.

                That's pretty much his point - which seems to have gone whooshing right over your head. The value of a stock is (theoretically) tied directly to the value of a company, yet the price varies even when the value doesn't - and he doesn't see why that should be. I tend to agree with him, the stock market has increasingly become an abstract game unrelated to the underlying real world it's (theoretically) based on.
                 
                One result is that we take the market to be something it isn't - an accurate reflection of the underlying structure, despite the fact that the two increasingly bear no relationship to each other.
                 
                The other (and more dire) result is that we increasingly hold CEO's responsible for matters they have no control over - which leads to them indulging in all manner of what are regarded as reprehensible activities in a vain attempt to raise the value to meet the price. (The whole 'nothing but next quarters bottom line' mentality so often derided.) This also happens at the other extreme, if for some reason everyone decided GE was worth (priced on the market) 30% less at the close of trading today than at the start - the CEO of GE would be held responsible even if absolutely nothing had changed regarding the value of the company.

          • Re: (Score:3, Funny)

            by Genda (560240)

            If we can simply survive another decade the bullshit will reach critical mass, and gravitationally collapse! Then all we have to do is feed lawyers, politicians, and banker into it with sufficient angular momentum, and we should have a nearly infinite source of energy.

          • by AK Marc (707885) on Thursday May 27, 2010 @04:14AM (#32359144)
            I hesitate to say the entire stock market in general because at its core there is something useful

            The "fix" is to have trades once every minute, and no more than that. Trades are executed to the number of "requests" times 90% (if there are 100 sell requests and 200 by requests, the lowest number of 100 is taken, multiply by .9 and so there will be 90 trades that minute). The sell and buy orders are randomly selected and then processed. Those passed over will be at the top of the queue for the next minute. I'm sure it would take some serious refining, but the idea is to completely eliminate microsecond fluctuations, eliminate priority trades, and make it "fair" for all. Either that, or make the market completely open where anyone can log on from anywhere and do a trade as if they are a broker. That would introduce many more problems than just batches and delays with limited processing, but it would fix many of the problems we have now.

            But, anyway it goes, there needs to be a complete re-write of the stock market. It's been perverted from the paper trading to a good-ol-boys network of computers with systemic abuses aimed at hurting people trying to use the system in good faith. As it sits now, abolishing the stock market and having companies sell their own stock in paper in person at their corporate headquarters would be a massive improvement. Sadly.
            • Re: (Score:3, Insightful)

              by Jah-Wren Ryel (80510)

              Do you honestly believe there were no systemic abuses when it was all paper? That just seems so incredibly naive.

            • Re: (Score:3, Insightful)

              by Herkum01 (592704)

              Why should they be delayed only a minute, why not a day? If they are a true stockholder, a day to wait is nothing. It is only people who are trying to skim money off transactions between people who are cannot wait. By comparison, stock owners hold most of the value in a company and we should be paying attention to their interests. Instead we have bent over and allowed faster traders to rule the roost against the best interests of everyone.

              • Re: (Score:3, Interesting)

                by DavidTC (10147)

                Indeed.

                I don't like that plan because it still allows casino-like behavior, though, and it introduces even more randomness, of which there will invariably be complaints about.

                I often say make people wait a month, although I've always conceived that as a delay from original purchase.

                The GP's idea of on-the-minute trades, and your idea of delaying it longer, has merit though.

                But I have a better idea. Let's leave things as they are, where people can buy and sell as fast as they want...but during each week,

            • Re:Well at least... (Score:4, Informative)

              by Kevin Stevens (227724) <kevstev&gmail,com> on Thursday May 27, 2010 @10:43AM (#32362058)

              But, anyway it goes, there needs to be a complete re-write of the stock market. It's been perverted from the paper trading to a good-ol-boys network of computers with systemic abuses aimed at hurting people trying to use the system in good faith. As it sits now, abolishing the stock market and having companies sell their own stock in paper in person at their corporate headquarters would be a massive improvement. Sadly.

              It was hard to decide where to begin with this. The stock market, back in the floor trader days, was massively corrupt. Do you know how easy it is to put your friend's or your own order in ahead of a large customer order when you are just talking over the phone or in person (and the technology to record phone conversations was expensive and lightly deployed if at all)? It happened all the time. Insider trading... happened all the time. You, as a retail investor, had 1/100th the access to the market that investors of size had, let alone professional traders. You have 30k in some brokerage account and trade a few times a year during the crash of 1987- good luck getting your broker on the phone to get out of your positions, he isn't going to take your call for days until all his high net worth and high churn clients are taken care of, if he ever returns your call at all. E-trade and the like leveled the playing field in a massive way. You think you had *any* chance as a retail investor to hear news that Buffet just started buying Pepsi? In 1987, as a retail trader your best bet for stock prices was reading the newspaper the next morning! I could go on and on, but in terms of speed of trading, information available to you, costs of trading, and the audit trails available because of electronic trading, the tables are vastly more level than ever before.

              The high frequency guys are not a good ole boys network. In fact, they are highly secretive, and since that piece of the industry is fairly small, they do tend to know each other from previous jobs, but this isn't an industry that is holding conferences and going out to steakhouses on expense accounts with each other. I work in the area, and I can tell you that many of these firms don't have websites, don't advertise where their office is, and won't even tell you what they are doing, even in late stage interviews.

              The stock market has ALWAYS had an advantage for guys with better technology. In the 1900's guys with telephones would rip off "bucket shops" and brokerages that didn't have that speed. Up until some point in the mid 2000's, floor traders, guys with bloomberg terminals, and anyone with a seat on the exchange had a massive advantage over retail traders. A summarized quote from one futures trader back in the early 90's: "The floor traders swoop in and react to the news first, then the next day or two the dentists come in, then everyone else comes to push the price up and the traders get out" Better technology has always given a massive advantage to traders. The difference now, between the 80's and 90's, is that its now very difficult to make a few bets on individual stocks and make a significant profit- information travels too quick (those floor traders can't rip you off anymore- the news hits the newswires and the stock price moves instantly). Technology has allowed the ability to make thousands or millions of very small bets for very short periods of time on stocks. So now instead of missing out on a $1 price move, these guys are taking pennies from you, usually due to opportunities you have no idea existed. In fact, what these guys do is often called "picking up pennies in front of a steamroller" because if they are too slow, they get squashed.

              Your last comment about companies selling stock directly is pretty childish. From the outside it may look like an exchange is just a chaotic casino with everyone screaming at each other for no good reason. But its not, most of the people there are serving a role to the exchange and have obligations in exchange for the privilege of being there. For instanc

          • Re:Well at least... (Score:4, Interesting)

            by seyfarth (323827) on Thursday May 27, 2010 @07:03AM (#32359958) Homepage

            ...When it's possible to get rich just managing other people's capital and skimming off the top then the way we organize our economy is broken. This house of cards cannot stand forever when you stack more and more of those people on top of the working class, the foundation, that actually produces wealth and knowledge.

            I think we need a federal stack exchange tax. If every trade is taxed, then the millisecond trading scheme will disappear. Instead people will think long and hard about investments and invest for long enough periods to make more profit than the initial tax. Of course if they were taxed as heavily as the sales tax I have to pay on food, then they might be investing for dividends rather than profits.

            Is there any better way to convert our casino-like stock exchange into a real investment system?

            Wouldn't this help with our federal deficit?

        • by Z34107 (925136)

          You're assuming that all technology is labor-replacing - that a better machine always displaces a worker. That doesn't mean "you need less people" - it means the same person can crank out more stuff.

          But I'm not arguing that the current economy doesn't suck, though it sucks less than last year. I'm also not arguing that high-frequency trading does anything useful for growing the economy.

        • Re: (Score:3, Interesting)

          by roman_mir (125474)

          A perpetually growing economy usually involves the average wage rising so average people can buy more stuff while still working less.

          - that is a misunderstanding.

          In the Free Market the wages are NOT supposed to rise all the time, with the efficiency in the market it is the prices, that are supposed to decrease. In fact the minimum wage law is the single biggest reason for the unemployment. The proof of this is of-course what happened after the WWII, while the Keynesians 'predicted' that the US will be worse off after the war ends (because Keynesians believe that Government must provide consumption, even if fueled by debt or stupid att

          • Re:Well at least... (Score:4, Informative)

            by Saint Fnordius (456567) on Thursday May 27, 2010 @09:57AM (#32361458) Homepage Journal

            Your fatal misunderstanding of minimum wages is where your model fails. Legislating minimum wages is designed to reduce disparity between bottom-rung wage earners and the top rungs of the ladder. When minimum wages stagnate, the top incomes increase even more dramatically. Also, empirical evidence is against you, with higher minimum wages actually triggering even more employment since (among other reasons) the lower incomes don't save, they spend.

            Oh, and please avoid the canard about the Government killing off businesses. Wal Mart, Best Buy, Clear Channel and their brethren have killed off far more small businesses than any government program has. In fact, government often keeps smaller busiesses alive with construction projects... or did you think the road crew companies work out of the goodness of their hearts?

            • Re: (Score:3, Interesting)

              by fishexe (168879)

              Your fatal misunderstanding of minimum wages is where your model fails....Also, empirical evidence is against you, with higher minimum wages actually triggering even more employment since (among other reasons) the lower incomes don't save, they spend.

              I agree. There's another, more important, reason why minimum wages trigger more employment, though: below the subsistence threshold the law of supply does not hold. Think about it: if you were working forty hours a week just to barely scrape by, and your wage was cut by 1/2, would you work less hours because you'd rather have leisure than the lower wage? No? Well that's exactly what both neo-classical and Austrian models say you would do. In reality, you would find a second job and try to increase your

            • Re: (Score:3, Interesting)

              by roman_mir (125474)

              Wall Mart, Best Buy, Clear Channel and pretty much all other large businesses are working with the government, they are Government propped Monopolies. They have been paying politicians to get tax breaks and various other perks forever, something that small and medium size businesses cannot receive out of government.

              That only supports my point that government creates giant monopolies by its policies and kills off small/medium size business.

              Your fatal misunderstanding of economics if where your model fails.

        • Re:Well at least... (Score:5, Interesting)

          by metacell (523607) on Thursday May 27, 2010 @05:00AM (#32359316)

          There is no reason better production methods should lead to unemployment in the long run. When production becomes more efficient, resources (like labour, capital and natural resources) are freed up to do other things, and so far, humanity has showed an incredible ingenuity in coming up with new things to produce and consume.

          Three or four hundred years ago, the majority of the population worked in agriculture. Today, we produce more food than ever, with only a few percent of the population tied up in agriculture. If we had said back then, "We must stop the industrialisation of agriculture, or the farmers will lose their jobs!", there would have been no one to work in the factories and produce the cars, toys, medical equipment, cheap clothes and furniture, and all the other things we have become used to today.

          The problem with unemployment is not that we have become too efficient in producing goods and services, but rather, that we have become worse at letting new, innovative providers of goods and services establish themselves on the market. Large corporations effectively block out competitors through patents, anti-competitive behaviour and friends in high places. Governments watch the backs of large corporations because they are afraid that they will go out of business and a large portion of their voters would lose their jobs - not realising they are at the same time helping the corporations stunt the growth of new businesses and new jobs.

    • What you seem to fail to realize is that growth has nothing to do with making a profit in derivative markets. And high frequency algorithmic trading has been here before, and now they step up that game. So as far as "change" goes, nothing has really changed, and nothing will, high frequency algorithmic trading is here to stay. If anything, this is making markets much more volatile. And if you think last weeks 1000 DOW drop was an exception, those are going to be more frequent.
    • Re: (Score:3, Insightful)

      perpetual growth is impossible to achieve in a finite universe.

      Technically, you only need to improve until everyone is happy. In other words, when we invent Soma. Or holosuites.

      Whether that's reassuring or terrifying is left as an exercise to the reader.

      • Re: (Score:3, Insightful)

        by sqrt(2) (786011)

        There will always be people who will not be satisfied with our current level of understanding, the current state of technology, and the current prospects for humanity's future. As has been true for all time, these people will push civilization forward.

      • by mwvdlee (775178) on Thursday May 27, 2010 @02:23AM (#32358522) Homepage

        Some people are mentally defective and will only be happy when they have more than others. Two such persons and they'll keep fighting eachother until everybody loses.

    • Re: (Score:3, Interesting)

      by Evtim (1022085)

      The last book I read about mathematics and physics of human interactions, including economy, was "Critical Mass (how one thing leads to another)" According to the author the best models for predicting the stock market still perform worst than "gut feeling" of an experienced trader.

      It seems that the models fail because no one out there plays the game according to the simple rules that are said to define the free market. Or because the system is inherently unstable and prone to collapse. Overall I got the ide

    • by Tom (822) on Thursday May 27, 2010 @04:51AM (#32359270) Homepage Journal

      So they figured that by using "high-frequency algorithmic trading" they could keep the profits coming in.

      "Profit" in the extended meaning of the word. There is no value being generated at the exchange, only well, duh - exchanged. So the value that they take out of the market ("profit") is something someone else had put in.

      Well, at the expense of whom ? How long can this trend be maintained before major problems arise in the economy ?

      Welcome to our time traveller from 2005. You may want to read up on the news to find your answers there. The short version:
      a) everyone else
      b) about 4 years, which were over in 2009.

  • Self regulating? (Score:5, Interesting)

    by dna_(c)(tm)(r) (618003) on Thursday May 27, 2010 @01:50AM (#32358348)
    So, the next global financial crisis will happen a lot sooner? This is not a good thing. They invest in speculation instead of companies.
    • If only the circuit breaker worked as quickly as these trades do, then we might avoid destroying a trillion dollars because of a typo.

  • And the moral is: (Score:5, Insightful)

    by Mathinker (909784) on Thursday May 27, 2010 @01:50AM (#32358350) Journal

    Buy gold.

    (Half in sarcasm, since if the world economy collapses totally, it would probably be better to have something like, say, food.)

    • Re:And the moral is: (Score:5, Interesting)

      by Inzite (472846) on Thursday May 27, 2010 @02:15AM (#32358480)
      There's a long-running joke among financial types....

      If things are gonna get worse, buy bonds.
      If they're gonna get much worse, buy gold.
      If you're still worried, buy canned food, ammunition, and land in New Zealand.
    • John Slattery for Prescott Financial urges you to diversify your gold portfolio with women and sheep [colbertnation.com].

  • by martin-boundary (547041) on Thursday May 27, 2010 @01:54AM (#32358366)
    He wants his arrow back... with interest :)
  • Sorry but I patented that idea^H^H^H^Hbusiness method.

    ... runs to submit patent application for switching legal strategies with a period of between 0.5 to 4 seconds ...

  • Practical Joke? (Score:5, Interesting)

    by the_povinator (936048) on Thursday May 27, 2010 @01:56AM (#32358388) Homepage
    I am wondering whether this story is some kind of practical joke.

    As someone who understands math to at least a certain degree (I publish in what is effectively applied mathematics), I know enough to say that this is bogus. The Wikipedia page on ordinal collapsing functions (http://en.wikipedia.org/wiki/Ordinal_collapsing_function) shows that they relate to transfinite numbers (various orders of infinity). It is, to me, beyond plausibility that this could have any practical application in trading-- unless it's some kind of weird fad that only the mathematicians understand is a joke. I think someone needs to dig down further into this source.

    • Re: (Score:2, Interesting)

      by creimer (824291)
      Don't bother. Just a bunch of BS artists hiring whiz kids to find a pony in a pile of manure. Won't smell pretty if they do find the pony.
    • Re:Practical Joke? (Score:4, Interesting)

      by Anonymous Coward on Thursday May 27, 2010 @02:15AM (#32358478)
      IANAST (set theorist), but my guess is that there are uncountably many trading strategies that don't allow for response to the other players strategies, but they can be indexed by ordinals (assuming choice). Furthermore, there is probably some kind of ordering on them so that a< b if b beats a. Transitivity would not be obvious (you probably would get somewhere if you restrict to some "good" subset or use some weaker sense of "beats"). Anyway, assuming that there are \kappa such strategies, and assuming that \kappa has infinite cofinality [wikipedia.org] you choose one strategy, and then someone else chooses a strategy that beats yours, so you use a larger ordinal (which then beats the other strategy). To index these larger ordinals you would need a way to represent them with finite data, hence the ordinal collapsing function. Terrifying. Set theory gives me nightmares.
    • SCIGen is becoming more convincing all the time.

    • transfinite != infinite a very large quantity that is effectively uncountable but not infinite. I would imagine that a few billion shares would effectively be uncountable during these short time periods especially with the inherent volatility that arises out of how the stock market works.

    • Re:Practical Joke? (Score:4, Interesting)

      by NeutronCowboy (896098) on Thursday May 27, 2010 @02:27AM (#32358552)

      I've done a bit of googling, but nothing else comes up. What did come up, however, was David Li and his copula function. I can barely follow the copula function, and set theory is completely beyond me. However, what I will believe in a heartbeat is that hedge funds will throw million-dollar salaries at people to come up with a mathematical function that will tell them whether to sell or buy or something, regardless of whether they have any clue what the function actually means or does.

      Again, I can't tell if this particular story is true or even makes sense. But the basic premise has already been proven.

    • Re:Practical Joke? (Score:4, Interesting)

      by SamSim (630795) on Thursday May 27, 2010 @04:29AM (#32359200) Homepage Journal

      It is, to me, beyond plausibility that [transfinite numbers] could have any practical application in trading

      ...The terrifying alternative, of course, being that Wall Street has discovered a way to create a literally infinite quantity of money, and a year from now, the only way to tell who is richer than whom will be by comparing the size of two transfinite ordinals.

      (It makes bank transfers insanely difficult because there's no consistent way to perform ordinal subtraction. If I have $^2 and I owe you $ then either I still have $^2 left over afterwards, or I can't pay you at all!)

    • Re: (Score:3, Interesting)

      by radtea (464814)

      I am wondering whether this story is some kind of practical joke.

      Given that most of what passes for mathematical logic is pretty much a joke, and mathematical logicians are for the most part far more logician than mathematician, and therefore some of the stupidest people in math, that's my read as well.

      Pretty much every logician I've ever dealt with has thought that Leibniz's Law is not only reasonable, but true, whereas we've known it to be emprically false for nearly a century. But logics that violate it are considered cutting edge, and are mostly toy models.

      On the ot

  • At least for us low-lives; my hypothecary credit depends on a fixated repayments carrier, and my interest is down and (almost) out.

    Now I just wish the credit would go away and leave me alone. :P
  • It's like solving a problem by making it worse.

    • Re: (Score:3, Funny)

      by syousef (465911)

      It's like solving a problem by making it worse.

      The technical term is "Wallstreeting".

      As in "Hey did you read about Tiger Woods Wallstreeting his marriage the other day?" or "Damn! I'm Wallstreeted".

  • by nimbius (983462) on Thursday May 27, 2010 @02:07AM (#32358430) Homepage
    many stocks are valued entirely on speculation? how does one apply logic to that? what about crap like derivatives trading? effectively a "dont ask, wont tell" sort of thing based entirely on what you "think" the value of something that has no value might become?
  • I read it as:

    Yadda yadda bunch of pseudo words yadda algorithm more yaddas.

    Seems to me they need a few good engineers to boil down the theoretics into something smooth and workable. This talk of switching models should be run in tandem algorithms to help tune up the main trusted one in use and to test every concept under the sun. At least thats how I would work it. If I were King. That gives me and idea...

    Gratuitous add: Vote for King elect Dilvish - he will ordinize your automated ruin, building more jobs.

  • Its worth a try, get out what you can while the machine is still been fed.
  • by Iffie (1410897) on Thursday May 27, 2010 @02:17AM (#32358496)
    Complexity in these algorithms is only to hide the fact that the are FRONT RUNNING trades, they have servers that are directly next to the ones performing normal trades and using the speed that affords they put themselves between buyers and sellers. Goldman Sachs steals 100 million USD every day. To hide this theft they claim sophistication. Same story with derivatives, they are FRAUD. to hide the fraud they are made 'complex' using the work of so called Quants. It is thieving and it is nonsense.
    • by Anonymous Coward on Thursday May 27, 2010 @02:37AM (#32358600)

      The same banks that perform HFT also act as brokers. They know where everybody's stop losses are. They can run your stops and cause you to sell, while triggering other people to sell the market short, then run the market back up and cause the shorts to cover, and cause you to buy again so you don't miss out. Rinse and repeat.

      • by DemApples (1770824) on Thursday May 27, 2010 @10:23AM (#32361768)
        I worked at one of the banks being lambasted here in a group that I left, within a year my peeps advised me that the group disappeared OVERNIGHT with no explanation. They pay big money to make the SEC an empty shell of what it's supposed to be doing (policing them). We need a big legal fence put up to keep these sharks away from "cash in a barrel" situations like being brokers and traders for the same products, and we need to vet any and all new products that hit the marketplace. Do we not remember the $4/gallon gas situation, an overnight doubling in price caused by pure speculation when we allowed oil companies to act as their own brokers? Wall Street banks bought oil companies and started Milken the public like crazy (pun unavoidable). Trusting Wall Street to not grab any and all cash it can any way it can is like trusting a starving 20 foot python to babysit your infant.
    • by purpledinoz (573045) on Thursday May 27, 2010 @05:08AM (#32359376)
      Isn't this some kind of insider trading? They are trading based on information before it is made public, but in the milliseconds range. The problem is the big players are given huge advantages, like free money from the Fed, while the rest of us suffer from the resulting inflation. Goldman Sachs and JP Morgan are way too powerful, they are powerful enough to destroy a currency, like the Euro.
    • by ortholattice (175065) on Thursday May 27, 2010 @06:10AM (#32359678)
      Micro-timing has no purpose other than to take advantage of ordinary investors who don't have access to this information. It basically amounts to a kind of insider trading.

      I would propose that ultra-short-term profits should be taxed at a punitive rate, perhaps approaching 100%, to discourage this kind of cheating of ordinary traders.

      Already, short-term capital gains are taxed at a different rate than long-term gains, in order to encourage long-term investment. Micro-timing is short-term trading taken to an extreme, so why not tax it accordingly?

      There is no valid reason why anyone should trade a stock multiple times per day - either it is pure gambling or there is some inside information behind it. Companies report their revenues and profits on a quarterly basis, not microsecond by microsecond. (Of course news stories may affect a stock, but even news stories rarely change more than once per day.)

  • This news is food for Slashdot readers! It is my guess that there are more logicians (albeit self taught...) here than at most forums. But, what do I know.

  • by Rick Bentley (988595) on Thursday May 27, 2010 @02:35AM (#32358594) Homepage
    This will end poorly (again). It's basically a bunch of business majors managing a poorly understood programming effort, but instead of running things in a development environment they're running it on massive computers and the variables are REAL MONEY. Hiring mathematicians to write their algorithms won't likely help, they will eventually do something stupid, divide by 0, have unbounded growth, or otherwise watch their program crash along with the market.

    I'm cashing out everything, buying canned food and ammo and moving to a farm.
  • Well, by now we should all know that the only way to make money on the stock market is by having some amount of insider information. Everything else you can more or less forget about. ...unless, of course, you hook up a couple of billion to a computer program and really, really hope that it does not contain any bugs whatsoever...

  • by JimboFBX (1097277) on Thursday May 27, 2010 @02:56AM (#32358742)
    If you watch a stock in real-time you can predict where it will move quite easily. Thanks to automated trading, you can just draw a line of best fit based on the stock's current direction and also determine a high and low amount of noise to where it will bounce around. Computer's have no idea how much a stock is worth, they just simply use these values to determine when to make a transaction and actually help self-perpetuate everything by being the major driving force behind a stock's movement. Changes in direction are caused by actual human intervention, such as a large buy order spaced out over several minutes.

    For example, if an algorithm says "the high point is at $10.50", then when the stock gets that high it will sell the hell out of it until it bumps the price lower. Then when it says "the low point is $10.42", it buys the hell out of it again. However, if it notices an overall downward direction, it will reshift what it's idea of a high point and low point are as time progresses, helping to self-perpetuate that downward direction since it is probably one of many automated systems that work similarly and overwhelm actual human interaction with the stock price.

    It's not necessarily a bad thing, if you realize this, then you can easily predict a stock's movement and make some easy income; knowing exactly where the low and high values are going to be at any point in time. Again, the only thing that causes a stock to change its movement is actual human interaction that results in the trend being broken.
    • Re: (Score:3, Insightful)

      by RajivSLK (398494)

      then you can easily predict a stock's movement and make some easy income;

      If it's that easy why aren't you a billionare? (or are you?)

  • Love it! (Score:3, Insightful)

    by jumpifzero (1815880) on Thursday May 27, 2010 @07:52AM (#32360224)
    Society is so fucked up that people are being paid 7 figure salaries to develop smarter gambling algorithms, that produce no real value, when they could help solving science hardest problems. Specially people with this knowledge.
  • by seniorcoder (586717) on Thursday May 27, 2010 @08:59AM (#32360828)
    The high frequency traders of today basically fall into two categories:
    • Those running algorithms that make use of various market anomalies to siphon money from the markets.
    • Those doing the latter-day equivalent of the role that used to be played by a market maker.

    The siphoners add no value to the market, in fact exactly the opposite. They take advantage of market anomalies that can only be detected by ultra-high speed trading to remove money from the system. A simple example of a market anomalies would be taking advantage of the distributed market place whereby you can trade the same stock on many exchanges and none of them perform at the same speed. So you see which way the stock is moving on a fast exchange and then take advantage of that on a slow exchange before it has had the time it needs to react. Just like betting on a horse race after it has finished because you know the result before the bookmaker is aware the race is over.

    The other high frequency shops are adding value to the markets in the same way a market maker used to. They serve a function of keeping the market liquid. This means that a buyer can always guarantee to buy a stock or a seller can always guarantee to sell a stock because the market maker keeps some inventory to bridge any transitory lull when there are more buyers than sellers (or vice-versa) and yet the price is deemed to be correct. They are the brokers who reduce fluctuations in the market and offer a valuable service, even to a joe who wants to sell his 50 shares in IBM.

    Just like anything, there are good guys and bad guys. The tool is high frequency trading. It can be used for good or bad, depending on who is using it and what they are using it for.

    Disclaimer: I don't do any high frequency trading.

  • by Fractal Dice (696349) on Thursday May 27, 2010 @09:49AM (#32361364) Journal

    4 seconds is too long to leave an opportunity of more efficient reallocation of capital unexploited, yet there are people who have been unemployed for over a year? This implies that we've created an economic system where it is a more efficient use of resources to rearranging ownership of theoretical constructs than finding a place in society for people who have none? Doesn't it seem that we've sort of lost sight of what the purpose of an economy is?

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