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Businesses Math The Almighty Buck

Sudden Demand For Logicians On Wall Street 525

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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  • by JimboFBX ( 1097277 ) on Thursday May 27, 2010 @01:56AM (#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:Well at least... (Score:2, Informative)

    by crunchyeyeball ( 1308993 ) on Thursday May 27, 2010 @03:21AM (#32359170)

    >That doesn't mean "you need less people" - it means the same person can crank out more stuff.

    Unfortunately, if the demand for said "stuff" is finite, and each person can crank out more, then "you need less people" is *exactly* what it means.

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

    by stygianguest ( 828258 ) on Thursday May 27, 2010 @03:23AM (#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

  • Re:And the moral is: (Score:3, Informative)

    by roman_mir ( 125474 ) on Thursday May 27, 2010 @03:39AM (#32359230) Homepage Journal

    Gold 'prices' do not deflate. Gold is the actual measure of value, like 1 gram = 1 unit of value. Gold can be accepted as the axis at 0,0,0 and everything else rotates around that axis.

    Gold and Dow prices will meet, then you will know that buying it is probably not better than buying Dow. However before that happens, Gold is still a good purchase. It's relative price in dollars is irrelevant as long as Dow's dollar price is much higher, only relative prices matter.

  • by TheLink ( 130905 ) on Thursday May 27, 2010 @04:18AM (#32359416) Journal

    I'm fine with high frequency trading. I'm not fine with "30 millisecond advantage" trading:

    http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html [nytimes.com]
    (it's probably a simplified description[1])

    The fact that the casino allows such stuff tells me that they and their friends are crooked. I don't really see how allowing this provides any advantage to the market or makes it more efficient.

    [1] I am not a fast trader but I think something similar to this happens: the mutual fund's program will fail to buy at $21 and so reissues another buy for 21.01, the "fast trader" program will then offer to sell at 21.50, if it sees no order from the mutual fund program after X milliseconds, it will try to sell at 21.45 and so on, meanwhile it buys all other stuff - hopefully before the other fast traders beat it. Alternatively it could offer to sell a few shares at 21.02, (check to see if the mutual fund sends an order to buy, then cancel, repeat till there are no buy orders, then go back down a bit and sell everything at that price, thus extracting as much from the mutual fund as you can). If the few shares are sold before you cancel it's probably a fast trader buying them. The tricky bit is countering the other pesky fast trader programs ;).

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

    by Saint Fnordius ( 456567 ) on Thursday May 27, 2010 @08:57AM (#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:Well at least... (Score:4, Informative)

    by Kevin Stevens ( 227724 ) <kevstev@gmail.cCOFFEEom minus caffeine> on Thursday May 27, 2010 @09:43AM (#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

  • by TheRaven64 ( 641858 ) on Thursday May 27, 2010 @11:59AM (#32364176) Journal

    Companies can issue new stock. When a company has its initial public offering (IPO), it generates some arbitrary number of shares, and offers them to the market at a certain price. People buy them, and the company gets the money, which is the number of shares multiplied by the initial price. Typically, some number of shares are allocated to the founders, or other people who held shares when it was a private (not publicly traded) company. These people make money if the price goes up.

    Companies can also issue stock after the IPO. If a company needs to raise capital, it has two choices. It can go to a bank and ask for a loan. This will then need repaying at some interest rate. If the expected return is higher than the interest rate, then this might be a good idea. Alternatively, it can issue some new stock and offer it to the market. If the market buys it, then the company gets more money.

    Issuing new stock has the same effect as printing new money; it causes something like inflation. If a company issues more stock, then the value of the existing stock goes down - the total value of the company remains constant[1]. If a company keeps issuing new stock, then there will be the perception that the company's stock value will decrease so no one will buy any when it's offered.

    If the new stock is offered at the correct price, then it won't have any effect on the stock price, because the increase in money in the company's bank account will precisely offset the decrease in stock value from the dilution.

    Ideally, the company will then use this new money to expand, and the value of the shares will increase. Effectively, the new shares are buying the new part of the business. If the share price goes up, then the company can later issue more stock and raise more capital.

    [1] This is a massive oversimplification, and doesn't take into account the secondary feedback. For a full explanation, you need a much more complex model. For example, if the company is issuing new stock to expand, then the market might take the planned expansion into account and the stock price may go up.

Too much of everything is just enough. -- Bob Wier