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Algorithmic Investors on Wallstreet 249

Posted by ScuttleMonkey
from the all-your-soy-futures-are-belong-to-us dept.
eldavojohn writes "Recently, setting up prediction markets that people play was the big thing to guess the future. But is there a chance that computers will replace investors? From the article: 'Quantitative investment managers use a model to identify sets of characteristics for their investments. Computing power is now relatively cheap. Obviously, computing power can access data almost instantaneously and simultaneously. Asset classes and financial instruments within those asset classes can then be screened and investments are selected. They reflect the manager's views.'"
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Algorithmic Investors on Wallstreet

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  • by eldavojohn (898314) * <eldavojohn.gmail@com> on Tuesday August 22, 2006 @06:45AM (#15954338) Journal
    More and more I see computers being used to harvest and cultivate data for market analysts and investors. Even Thomson [theregister.co.uk] has built software to deliver market news. From that link:
    Thomson has built some computer programs at $150k-$200k a pop to deliver automated articles on US market news. The programs can publish a news story on, say, company financials, within 0.3 seconds of their release to the NYSE or NASDAQ. This is purportedly helpful to hedge traders and others of their ilk.
    $150-$200k? Looks like there might be some profit in artificial intelligence afterall. Although I wonder if this would even be considered AI?
    • by Stellian (673475) on Tuesday August 22, 2006 @07:49AM (#15954478)
      More and more I see computers being used to harvest and cultivate data for market analysts and investors. Even Thomson has built software to deliver market news.
      Folks who suggest replacing human investors with computer algorithms don't understand the basic workings of the stock market. You cannot predict the next value of a stock simply using past and current information from within the stock exchange. You cannot find a `pattern` in the stock price no matter how much computing power you use: there is no pattern, except for the well know economic cycles that influence all stocks. Besides, even if an algorithm could be devised, it would be useful only if it could be kept secret, otherwise using it on a large scale will deny any speculative gain.
      The price of a stock is determined by external factors, and the key into being a good investor is access to information: who sued who, what is the union planing, what product is the competition developing etc. So to replace humans with algorithms, you must make them as intelligent as humans in the basic task of finding and understanding information. AI is ages away from this stage, and when/if we will finally have such powerful AI, the stock exchange will be our last concern.
      • by EastCoastSurfer (310758) on Tuesday August 22, 2006 @08:17AM (#15954560)
        Actually a lot of patterns are showing themselves in the extreme short term (think seconds here). There are so many automated trader/AI types of software exploiting already these patterns, as soon as one is found it doesn't last long since others jump in. I don't have a link handy, but I read a good article awhile back about econophysicists looking for and finding short term patterns in the market.

        I also know of a company nearby doing exactly that and doing well and have an acquaintance who retired at the age 35 or so after running his companies dept. who found (using algorithms) and exploited these patterns that don't exist.
      • by G4from128k (686170) on Tuesday August 22, 2006 @08:50AM (#15954686)
        First, there are patterns. You are right that those patterns have a limited capacity to absorb trading and that anyone who finds a pattern would do well to keep it a secret. The EMH (Efficient Markets Hypothesis) is best lampooned by the following old joke. Two economists are walking down the sidewalk when one of them spots a $100 bill in the grass. The first economist starts to pick up the $100 when the second economist tells him, "Don't bother, if it were a real $100 bill, someone would have already taken it." Moreover, EMH makes predictions about the statistical distribution of price movements and the volume of trading that are empirically false.

        Second, the price dynamics are not entirely caused by exogenous factors. Investors, speculators, the media, and government officials do watch the prices. People make buy and sell judgments without any fundamental basis such a stock being "expensive" just because the stock is $300/share (never mind understanding the relationships between price per share and capitalization). Humans also have instinctual beliefs in patterns such as trends or momentum that are self-fulfilling. If enough traders believe in trends or momentum, they will trade in a way that creates trends.

        The profitable patterns do exist (and so do a large number of profitless pseudopatterns). People with a very sound understanding of both market psychology and statistics can and do succeed.
        • Re: (Score:2, Informative)

          by Kelbear (870538)
          The parent is right, there are very few that believe in a strong form of efficient markets where a profit cannot be made off information.

          However, most people agree that publicly available information will be absorbed by the market and eat available profit from that information. The key point of dispute is how quickly this information will be absorbed. So having a program to mull through the flood of information quickly to help capitalize on it is not too hard to believe. Particularly when the guidelines for
        • by cartman (18204) on Tuesday August 22, 2006 @04:02PM (#15957909)

          I've never believed in the EMH, but I'm going to try to defend it anyway.

          The EMH (Efficient Markets Hypothesis) is best lampooned by the following old joke. Two economists are walking down the sidewalk when one of them spots a $100 bill in the grass. The first economist starts to pick up the $100 when the second economist tells him, "Don't bother, if it were a real $100 bill, someone would have already taken it."

          I've heard that joke many times, and it always seems to me like a false analogy. The EMH doesn't deny the possibility of luck; it denies the possibility of systematically beating a competitive market. The patch of grass is not a competitive market, and finding $100 there by luck is not beating it systematically. In other words, there are fundamental differences between equity markets and patches of grass. For example, shares of the grass are not being bought and sold, therefore information about the existence of the $100 is not being incorporated into prices, which is a fundamental assumption underlying the EMH.

          A better analogy would be the following. Assume the existence of a patch of grass upon which a given amount of money falls according to some pattern. Assume also that there is a mature, well-developed industry to predict when the money falls. Assume also that the industry is competitive; ie, when one person takes the money from the grass, it's no longer there for another to take. Assume also that there is some monetary cost to visit the patch of grass and determine if there's any money there. Given all those assumptions, at some point, the grass would cease yielding abnormal returns--in other words, the cost of visiting the grass would equal the average amount found there, given the best available algorithm for determining how much money will be there.

          Second, the price dynamics are not entirely caused by exogenous factors. Investors, speculators, the media, and government officials do watch the prices. People make buy and sell judgments without any fundamental basis such a stock being "expensive" just because the stock is $300/share (never mind understanding the relationships between price per share and capitalization). Humans also have instinctual beliefs in patterns such as trends or momentum that are self-fulfilling. If enough traders believe in trends or momentum, they will trade in a way that creates trends.

          The EMH people would probably respond as follows. Granted, humans believe in patterns which can become self-fulfilling prophecies. Thus, they create a pattern. However other, more sophisticated traders are also aware of the pattern ("momentum") and will place trades that destroy the pattern. For example, if I (as an investor) recognize momentum then it would benefit me to buy shares at the beginning of momentum and sell short at the end, before the bubble bursts. If I do this profitably, then I (and other, similar investors) will control an increasing share of the money being invested, and "momentum" will no longer occur. Note that this pattern-destroying mechanism can occur with any pattern that could be recognized, including self-fulfilling prophecies of naive investors, and including momentum.

          ...Nevertheless, EMH aside, there are trends which can be identified. One example is the NASDAQ from 1997-2000, which is a particularly striking incidence of momentum. That trend persisted even though there was frank discussion by experts months beforehand that the NASDAQ was certainly in a tremendous bubble. The fact that momentum persisted for years despite publically available pronouncements by all experts that there was momentum, is difficult to reconcile with the EMH, since the EMH asserts that any such trend would automatically disappear.

          I believe there's a fatal flaw with the EMH. I believe the EMH rests upon a number of assumptions, one of which is false. But this post is already long enough...

        • Re: (Score:3, Insightful)

          by HiThere (15173) *
          Maybe. But strangely enough being a successful trader in one quarter doesn't predict that you will be successful in the next quarter.

          My suspicion is that skilled traders avoid many common mistakes...but that most of being a "very successful" trader over any short period of time, say a year, is luck. It also means taking unwise chances with other people's money. Most such traders will lose, but some will win. When they lose, their clients lose. When they win, their clients win, and they gain more client
      • Re: (Score:3, Informative)

        by the_womble (580291)
        You do not quite understand the sorts of things computers are beings used for.

        They are not just picking stocks.

        They are being used to do things like:

        Incidentally the article is pretty useless: it does not actually have very much specific content, does it?

      • by Kadin2048 (468275)
        and when/if we will finally have such powerful AI, the stock exchange will be our last concern.

        I agreed with you right up until this point. I think that when we do get an AI that powerful, the very first thing anyone will do with it, is put it to work gaming the stock market. Maybe after that, someone will try asking it for the cure for cancer or how to bring about world peace. But I'm pretty sure that "what's the next Yahoo?" will be first.

        In a similar vein, I'm pretty sure if anyone ever builds a device t
      • Don't forget that computer models don't just use `stock price patterns', they also use things like company financial statements, planned projects (often disclosed in financial statements), expenses, etc., as well as google...

        Across all that data, there are patterns... (heh, that's my PhD research topic!) they may only give you a slight advantage over everyone else, but I bet that's the point... to have a slight advantage to beat the market average return. If your prediction of the market is just a bit more
      • Use mmm, a bayesian classifier to rate news announcements for positivity/negativity towards a particular stock. Rather than trying to develop an AI, let evolution do it for you. Download the news, stock info, classify the news pages, hand all the info on the market to a couple of hundred thousand simple genetic algorithms, kill off the bottom 10% or so and mate & mutate the rest. Over the generations some sophisticated algorithms will develop which can use factors like news information and the likely re
      • I'm sorry, but there is just no way possible for you to make the statements you've made and call them "authoritative."

        You're assuming that since you haven't found a pattern, and since nobody has suggested a successful pattern, that one does not exist.

        Honestly, if you found a reproducible, reliable pattern in stock market data, would you give it away? How long would you take advantage of the situation before releasing your research in the name of science? Even if you're not a greedy person, who would give aw
        • Well I think he's right on some levels... of course if you found such a pattern you'd want to keep it to yourself... but if you DID releases it what would happen... everyone would try to trade based on that pattern and then the pattern would no longer exist because people changed their habits once they saw the pattern. It's almost paradoxical.

          Thinking about computers looking for patterns and you've got almost the same thing. The more computer controller traders you've got then the more predictable the ma
      • by kabocox (199019)
        The price of a stock is determined by external factors, and the key into being a good investor is access to information: who sued who, what is the union planing, what product is the competition developing etc. So to replace humans with algorithms, you must make them as intelligent as humans in the basic task of finding and understanding information. AI is ages away from this stage, and when/if we will finally have such powerful AI, the stock exchange will be our last concern.

        Nah, the AI should be smart enou
      • Actually, the stock market is more about being lucky and spreading your risk. The people who make a lot of money keep their methods secret because in reality there isn't any real method: we see people do well and assume there is some secret; we see people do poorly and assume they did something wrong. But it all comes down to hedging your bet and hanging on, and the laurels to the serendipitous few and their superstition.
    • by nelsonal (549144)
      This is pretty old news, it really began in the 70s. Wall St has long been one of the largest customers of big iron and they've been hiring lots of bright programmers and mathmaticians for at least 10 years (and they pay really well). Search Monster for quant some time (better yet beg borrow or steal your way onto a Bloomberg and do the same search).
  • Nothing new here (Score:5, Interesting)

    by zero_offset (200586) on Tuesday August 22, 2006 @06:53AM (#15954356) Homepage
    Big deal, computer models have influenced trading for decades. And not only would it be "irresponsible" to fully automate trading (as the article states), it would also be "illegal". Computer-driven market analysis and prediction is a huge industry -- the big firms spend vast amounts of money on it. I'm not seeing what's newsworthy here, for slash or for El Reg.
    • Re:Nothing new here (Score:5, Interesting)

      by CastrTroy (595695) on Tuesday August 22, 2006 @08:25AM (#15954587) Homepage
      Yes, but if you could mostly automate it, you could do the trading a lot cheaper. Instead of paying highly qualified people hundreds of thousands of dollars per year, you could hire someone for $10 an hour to click on a sell/don't sell dialog box on a computer all day. The computer would be the one making the decisions, but the person would be giving the final order, making it not completely automated. Of course, the person would only ever click on sell, and the computer would only ever present an option which was a good idea to sell. However, the person would just be there to be the human loop in the process, and to ensure that there wasn't something extremely fishy going on with the trading.
      • Umm you never pay someone $10/hour who has to power to singlehandedly cost you billions.

        Even with the safeguard you mentioned the person could take their time hitting the button, and they wouldn't know enough to notice when something fishy was going on.
        • by hughk (248126)
          I know a few minimum-wage traders. We won't say what kind of bonus they get though. That definitely isn't minimum wage.
      • Ok: assume that this happens on a large scale some time soon, someone will then find a way of manipulating this to make a sackload of money at the expense of the bots. At this point the approach should be abandoned (although it is quite possible that the people who broke the system will be held to have done something illegal, but that is another issue).
        In a sense these algorithms have been in use for decades. If you look at the way SCO has been performing over the last few years, the chart fundamentals th
      • by inKubus (199753)
        The problem is that a system like this would need to self-regulate. This means that it would tend to move to a static stable point wherein everyone is happy with their shares. If you designed it the other way, there would be chaos. The problem is that the market, and the economy, is based on the MOVEMENT of money. The trade of money is what happens on Wall Street. It is no longer just trading the ownership of a company. A system such as this would need to be designed to make everything as stable as po
    • Of course the next big trend would be hacking of these systems. Sure not nessesarily classic hacking per say, but if may traders used the same system there might be a way exploit the algorythm to encourage buying or selling of a specific stock via specifically worded press releases and timed buys and sells. Trust me, it will happen.
  • Late reporting (Score:5, Informative)

    by Shoten (260439) on Tuesday August 22, 2006 @06:54AM (#15954357)
    This is nothing new, and it's not even something that's restricted to the world of money managers. It's being used by individual investors now, and has been for years; it's called "technical investing". The definitions of combinations of factors (market cap, financials, etc.) are called 'screens', and are a common source of discussion on forums like those found on The Motley Fool [fool.com]. There's software for sale, priced for individual investors, and there are websites that will even allow you to save your screens to use periodically, looking for new possible stocks to buy into (or to check and be sure that your existing portfolio matches the parameters you want).
  • Replace investors? (Score:5, Informative)

    by Aladrin (926209) on Tuesday August 22, 2006 @06:56AM (#15954362)
    Wow, great summary... The computers wouldn't be replacing investors, but 'investment advisors'... That's a whole different rung on the ladder. If they replaced the investors, there'd be no money and the stock market would die.

    As for replacing the advisors... Even the article tells you that isn't going to happen. "They reflect the manager's views." Oh... So if there's no manager, there's no view... and the computer does nothing. So you can't drop the advisor.

    This is simply another tool. It's not going to change much. My father will still complain bitterly when his portfolio loses money, and complain a little less when he's almost back to where he's started... again. And again.

    The fact is... If everyone made money, the stock market would be an impossible thing. Some people will lose while some will gain. No magic piece of software is going to change that.
    • by vialation (885786) on Tuesday August 22, 2006 @07:08AM (#15954391)
      This would true except for the fact that our market is NOT a 'zero-sum' system. Just because someone makes money does not mean someone else has to lose money. Investors are investing in these companies for their own benefit, but what does the company do with this money? They use it to expand their business, fund things, etcetera. This creates wealth -- when a company produces a product, that is wealth, in terms of stock. Nobody lost money in the production of that product. In fact, others probably gained wealth as well, as that company may have bought materials and parts from other companies, with them making a profit off of selling their created wealth. Just because there is a static amount of physical cash in this system does not mean that the amount of wealth is static.
      • by tverbeek (457094)
        "Just because someone makes money does not mean someone else has to lose money."

        The other side of the coin is equally important: just because someone loses money does not mean someone else has to make money. It's all imaginary. The stock market used to serve the purpose of helping would-be businessmen find people with the resources to help start their companies, but has morphed into a numbers game, a form of legal gambling to create phantom "wealth" for those who play the game well, producing nothing o
        • by qbwiz (87077) * <`moc.ylimafnamuab' `ta' `nhoj'> on Tuesday August 22, 2006 @08:35AM (#15954634) Homepage
          Actually, it does help the company that releases the stock. IPOs can raise a lot of money for a company, which they can use to make more money. When the company becomes large and profitable, you get dividends, which benefit the person owning the stock. It works for both people.
        • After all, when you buy a stock, the only businessman who clearly benefits from that is the broker. And when confidence in the market evaporates, the confidence scam ends and all that phantom wealth disappears with it. What a house of cards to build an economic system around.

          With that definition all economics is gambling. If I build gadgets or grow corn, I'm "gambling" that I can trade it; if the market for the item dries up all the value disappears. When you buy stock you are purchasing part of a compan

        • by Dare nMc (468959)
          >After all, when you buy a stock, the only businessman who clearly benefits from that is the broker.
          I don't disagree with your assement of the scenrio, however real money does go into the IPO, and does (sometimes) infuse a company with the resources to grow. other times it just pays off (excesively?) the people who already did all the hardwork, and took the risks in creating a company.

          If their wasn't people trading stocks, then their wouldn't be the incentive to those who purchase IPO's... As far as t
    • by Eivind (15695) <eivindorama@gmail.com> on Tuesday August 22, 2006 @07:29AM (#15954437) Homepage
      The fact is... If everyone made money, the stock market would be an impossible thing. Some people will lose while some will gain.

      That's a pretty fundamental misunderstanding.

      If that was true -- if the stock-market was a zero-sum game where the only way to win was to have someone else lose the same amount, then there'd be no point in playing it. Your average return would be zero.

      Luckily that is not the case for investments. It *is* the case for speculation (for example day-trading) but that's something else.

      When you buy $1000 worth of oh, say, Arendal Fossekompani. You are buying a certain small part of a company. The company, as most companies, try to turn a profit. On the average, they manage that. Some companies make a loss and (if they stay like that) eventually go bankrupt. But the sum total of the profits (or losses) of all companies is hugely positive.

      Now, your $1000 part of the company made say $100 of profits this year. They can do two things with this money. Either they divide their profit up and give it to the owners (that's the ones holding the stock), in which case you'd get $100 cash as dividend.

      Or they can invest the money, for example use this years profit to improve the powerplant so that it'll produce more power next year. In this case you still own a certain part of the company, but it's a larger, more valuable company. (your piece should now be worth on the order of $1100, but market-forces can change this in either direction) The stock market is not a zero-sum game with no profits. It's a game where the profits are, over time, equal to the average profit of the companies you invest in.

      • by siliconwafer (446697) on Tuesday August 22, 2006 @08:28AM (#15954597)
        Investing in the entire market, since 1927, has returned on average of about 10% per year. That's a handsome return! This is the beauty of index investing, which you described. The layperson can easily purchase index funds and sit back and relax. This is a great alternative to the higher cost managed funds which mostly do not beat the market. With an indexed approach it is impossible to underperform the market, because you're buying the market.
        • by inKubus (199753) on Tuesday August 22, 2006 @11:07AM (#15955547) Homepage Journal
          Yeah, it's smart to be in the market because you are getting the money of all the people who aren't on the market but spend money at these publicly owned businesses.

          But the real growth of the economy is all based on debt, the government decides how much to lend out and that decides how big companies get and how much money there is to pay workers and stuff.

          Of course, if you get too much money out there relative to other countries (like now, where the government has been printing $500B per year of new money in the form of debt), your currency falls and your money is worth less and less. You can only push so far before people begin to lose confidence. Having a good leader can really help out the confidence, both in and out of the country. But the economy is showing that it could take the huge infusion of money pretty well and we're sending it to China and they're still taking it so what do we care?

          Now, what's going to happen when we move to one world currency? Well, it's going to be a long process and there's going to be a big war and eventually we'll all settle down and we can all move a bit slower. But as long as there are more people than there is available water, food, energy, etc. it will not be possible. I think we will probably hit that population number soon. I like to follow the progress of the "Euro" because that was a major major change for the world that we haven't even felt yet. In the West we have most of S. America tied to the dollar now. Since Europe is now the biggest economy in the world, once they get the kinks straightened out, free up trade between the member states and drop tax rates, they(you) are going to be a force to reckon with.

          The only country with anything to fear right now is Russia; they have a huge land mass with huge resources and on the outside you have overcrowded China and Japan in the East, and Europe on the West. But I like the Russians, I think they are some of the most brilliant people. I think they will be our friends.

      • by mwvdlee (775178)
        At it's most basic level, the total of all shares would represent the total value of all companies. This underlying value can only grow when the population grows, allowing for introduction of currency without inflation.
    • by khallow (566160)

      Wow, great summary... The computers wouldn't be replacing investors, but 'investment advisors'... That's a whole different rung on the ladder. If they replaced the investors, there'd be no money and the stock market would die.

      That is incorrect. There's no reason a computer program couldn't own the investments it manipulates. In fact, I'd say that there's a good chance that you get proven wrong by the end of the century.
    • The fact is... If everyone made money, the stock market would be an impossible thing. Some people will lose while some will gain. No magic piece of software is going to change that.

      Thanks to the inputs of human labor and intelligence bringing increases in productivity into the economy, the stock market is not a zero sum game. Even accounting for inflation, there has been real growth in the overall value of the market, just as there has been real growth in the overall value of the world economy. So it IS p

  • by Anonymous Coward on Tuesday August 22, 2006 @06:58AM (#15954371)
    More importantly, the models provide insight into market inefficiencies to be applied rapidly across asset classes and the vast number of financial instruments within those asset classes.

    What they're talking about is arbitrage and trading, not investing. Their trades are designed to be in the short-term. Sometimes, very short-term - within a second.

  • 12:15 Press return.......
  • by Registered Coward v2 (447531) on Tuesday August 22, 2006 @07:05AM (#15954384)
    The key comment was:

    More importantly, the models provide insight into market inefficiencies to be applied rapidly across asset classes and the vast number of financial instruments within those asset classes. Whole markets can be analysed daily for buy and sell indications at an individual instrument level. This enables portfolios to contain a larger number of instruments and reduce risk through greater diversification of the portfolio.

    As inefficiencies are identified (such as when the return / risk ratio is not correct) provides an opportunity to increase returns by taking advantage of them. Of course, as more people use models the inefficiencies will be corrected quicker, leaving less opportunities to exploit. In effect, the market fixes itself. This, of course, is nothing new - markets adjust to new technologies all the time and eventually the opportunities they offered disappear; for example when the telegraph first came out no doubt someone discovered they could buy an item at one place for less then the same item where they were and arbitrage the prices - but as more people started doing that the spread disappeared.
  • ...cos I can already see the first search result output in front of me: "double the stockkiller delete select all"

    Would be interesting to see how an advisor would interpret -that- ;)
  • LTCM anyone? (Score:5, Informative)

    by dtd201 (220624) on Tuesday August 22, 2006 @07:14AM (#15954403)
    The use of computers models to predict what to buy has been around for some time. The absolute belief in these models caused Long Term Capital Management to go under in 1998 ( see When Genius failed [amazon.com] ). I also highly recommend reading Fooled by randomness [amazon.com]
  • by Anonymous Coward on Tuesday August 22, 2006 @07:17AM (#15954412)

    back in 1987 when automated selling by computers was blamed for making the collapse worse

    The most popular explanation for the 1987 crash was selling by program traders. Program trading is the use of computers to engage in arbitrage and portfolio insurance strategies. Through the 1970s and early 1980s, computers were becoming more important on Wall Street. They allowed instantaneous execution of orders to buy or sell large batches of stocks and futures. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. Some economists theorized the speculative boom leading up to October was caused by program trading, while others argued that the crash was a return to normalcy. Either way, program trading ended up taking the majority of the blame in the public eye for the 1987 stock market crash.

    http://en.wikipedia.org/wiki/Black_Monday_(1987) [wikipedia.org]
    • by mjh (57755)
      While I'm sympathetic to this concern, it seems equally probable to me that irrational human behavior could trigger the same sort of problem. Interestingly, here's the very next paragraph in the article you linked to:

      Economist Richard Roll believes that the international nature of the stock market decline contradicts the argument that program trading was to blame. Program trading strategies were used primarily in the United States, Roll writes. If program trading caused the decline, why would markets whe

  • by Anonymous Coward on Tuesday August 22, 2006 @07:21AM (#15954421)
    The efficient market hypothesis states that the price of a stock reflects all that is known about a stock. It is therefore impossible to outperform the market on a long term basis. http://en.wikipedia.org/wiki/Efficient_market [wikipedia.org]

    Warren Buffet has outperformed the market over many years. http://en.wikipedia.org/wiki/Warren_Buffett [wikipedia.org]

    Buffet understands the economy and invests accordingly. The computer programs only understand the market. In other words they can't really respond faster than the rest of the market. Buffet can be years ahead of the market.
  • So when a person is born, using models and best decision practices, the system(s) can predict what the earning potential (investment wise) for the new born is. Compiled with analysis of their genes, the life expetancy and health of the new born can also be determined. Then, the system(s) can decide if the new born will be a drain on society or not. Given enough computing power, data models, and algorithms, mankind's future will soon be predictable.
    • Re: (Score:3, Funny)

      It already is. I've got your printout and it's kinda funny with some unpleasant details (You wouldn't believe to what detail they can predict things). Oh, and look out next monday, you better don't... well, I suppose I better not change your future as it upsets the administrator, but I suppose I could let you know not to wear something white, or anything that would be ruined by blood stains. Don't worry, you'll live. Kinda.
      But don't feel upset now. The 12-year recovery afterwarts is worth it, the artifica
  • Dangerous idea (Score:4, Insightful)

    by Opportunist (166417) on Tuesday August 22, 2006 @07:39AM (#15954454)
    Let's be honest here, the "human factor" was what made some huge enterprises possible. Because some humans believed in something the "numbers" alone didn't predict. Do you think Google would have found an investor in its early days?

    Investment by numbers is by definition a rather conservative way to invest. In other words, put your money where there already is money. Risk investment is usually something done by visionaries, not by bean counters. And yes, 9 out of 10 times the idea bombs. But the one that works pays hundredfold.
  • http://science.slashdot.org/article.pl?sid=06/08/2 1/1646238 [slashdot.org]

    Until you can look at the numbers of a company and know everything about that company with certainty (meaning that a human _could_ do it if they had an infinite amount of time), or until we have computers that are great at telling when people (enron) are bluffing, I'll stick with investmant companies that rely predominantly on humans.
  • Many times I have played with the idea to try to find patterns in stock history to aid prediction, but where to find the data set to work with? I'm not prepared to pay for it, of course.
    • by teslar (706653)
      You remind me of a guy a while back. He always restated his assumptions:

      One, Mathematics is the language of nature.

      Two, Everything around us can be represented and understood through numbers.

      Three, if you graph the numbers of any system, patterns emerge. Therefore, there are patterns everywhere in nature.
      Evidence: The cycling of disease epidemics;the wax and wane of caribou populations; sun spot cycles; the rise and fall of the Nile.

      So, what about the stock market? The universe of numbers that represents th
    • Yahoo's financial site has data. (The only free place I've found too.) finance.yahoo.com, look up a quote, click the graph, on the bottom of the page: "historical prices." Set ranges and frequencies for data, then at the bottom again, "download as spreadsheet," CSV.
    • ...where to find the data set to work with?

      Look for August 21st, 2006 post on my blog @theparticle.com [theparticle.com]. There's a TON of data out there... just gotta look for it.
  • Hedge funds are sometimes seen as the "smart money,'' and their managers hailed as market iconoclasts whose quirky, daring trading styles are central to their success. But some of the smartest traders are often beaten by an unlikely foe: the room full of man-high Hewlett-Packard computers that are the brain of AHL.
    http://tinyurl.com/ke2ey [tinyurl.com]
    • Re: (Score:3, Insightful)

      by Red Flayer (890720)

      Hedge funds are sometimes seen as the "smart money,'' and their managers hailed as market iconoclasts whose quirky, daring trading styles are central to their success. But some of the smartest traders are often beaten by an unlikely foe: the room full of man-high Hewlett-Packard computers that are the brain of AHL.

      BS. Successful hedge fund managers do not have "quirky, daring trading styles." Every successful hedge fund out there has a set of metrics and a set of formulae that they apply in order to dete

  • Surreal... (Score:2, Interesting)

    by vhogemann (797994)
    Let's assume that we could do that, setup a bunch of algorithms wich only purpose is to make money. And let's assume that this AI is much better than a human at making market decisions, it always pick the best choices, it always wins.

    If that happens, and if all the investitors has access to such software, my bet is that the whole point of investing on market will flop. Since everybody will always "win", nobody will actually make a huge profit, the money will enventually be equally distributed among all inv
    • Re: (Score:2, Insightful)

      by Mung Victim (821757)
      If that happens, and if all the investitors has access to such software, my bet is that the whole point of investing on market will flop

      Not at all. Every major player in the market already uses some kind of computer modelling, for risk analysis, pricing, arbitrage or whatever. There is basically a perpetual arms race as different investors come up with new strategies or better ways of modelling a particular part of the market. The result is a more efficient market - fewer things are mispriced.

      The sad thing
    • by Ihlosi (895663)
      The sad thing about capitalism is that there's always a fixed amount of money on the market,



      *BZZZZZT*



      Please look at your textbook again.

    • "The sad thing about capitalism is that there's always a fixed amount of money on the market, so to win somebody else has to loose."

      You forgot that governments print money. They make it out of thin air and devalue currencies. The US government is doing exactly that right now. There are inputs to the economy, the sun, oil, human inventiveness which mean it isn't a zero sum game, it's only zero sum on the very shortest timescales.

      In the end this could mean a good thing, and we can turn our attention from pure

  • Read "Debt of Honor" (Score:3, Interesting)

    by Puls4r (724907) on Tuesday August 22, 2006 @07:54AM (#15954488)
    I suggest you go out and read "Debt of Honor" by Tom Clancy. As always, he fabricates and exaggerates, but all the same it will give you a very good idea why reliance on a computer trading model is a "Very Bad" thing. I.E. - if you know how a computer program works then you know how you can break it or cause it to react. If you can do that, then suddenly you have the power to control the market. Clancey went a bit further theorizing that a programmer was bribed to place an easter egg in the system, but all the same the ideas are there and are valid.
  • Someone's going to write a trade-bot in VB.net and it's 1929 again.
  • by 140Mandak262Jamuna (970587) on Tuesday August 22, 2006 @08:06AM (#15954530) Journal
    Yes, cost of computing is falling like a rock. Yes, tons and tons of data are available and increasing more accessible. What XML tags and electronic submission requirements by SEC. So there is big money in "programmed trades"?

    When everyone is crunching numbers on their head, the computing might give an advantage. If everyone is computing with compters, the advantage goes to the one with better algorithm. And the better "algorithm" might actually turn out to be thinking and looking at the global picture instead of madly computing.

    When huge trades are decided by these algorithms it is almost like a huge herd of milling cattle. When the stampede, just get out of the way. But if someone could trigger a stampede and send it over the cliff, there will be rich pickings later. And in free markets, if there is a way for someone to make money, someone will.

    I think algorithmic investing is the new name for the old "programmed trades" and it might actually make the thinking and studying fundamentals investors richer.

    The code is

    if( InputDataIsGood() && AlgorithmIsGood() && AlgorithmIsBetterThanOthers()){

    Output(profit);

    }else{

    Output(loss);

    }

    • ...the advantage goes to the one with better algorithm

      I was thinking about this a lot. Basically, if someone made a perfect stock trading program (imagination-land), and then sold it to -everyone-, how would it work?

      Ignoring that it would be a chaotic feedback loop, in the best of cases, it would still make money for -everyone-, but at the rate that's highly correlated with the overall economic growth. Imagine a completely efficient market (where if you buy stock at $20, you -know- it's worth $20 on that da
  • by StressGuy (472374) on Tuesday August 22, 2006 @08:21AM (#15954574)
    A friend of mine tried writing his own auto-investment code to see if he could actually make a living at it. His plan was to dedicate a computer to doing nothing but scanning the market and making investments for him. Well, he's not doing that today, and he's probably one of the most intellegent people I know. I also rememeber a concern that, if everybody used automated investing, the market would become highly sensitive to change (or...unstable) as you'd run into situation where most, if not all, of the algorythms out there would react the same way to certain market changes.

    Still, it's intriguing isn't it? I mean, one of the things I use computer programming for is to learn how things work. I look at it this way; a computer is rock-stupid, but it does exactly what you tell it to do. So, if I could write a code to do market analysis, I'd be learning the intricacies of how to do it along the way. Sure, most invesment sites have tools for you, but there is value in learning the underlying mechanisms.

    Seems the best approach would be to write such a program to simply do the analysis, then you make the final commit to buy or sell. You'll have a good idea how to interpret what you get back because you told it what to do in the first place and you should be able to spot errors/weaknesses in your strategy. It could be downright symbiotic.

  • The problem with developing a perfect algorithm to predict the market is in recognizing that your algorithm is also a participant in the market. Any actions it takes will also affect what it's predicting. It doesn't introduce much error on small scales, but on any significant investment levels, the distortions on a single stock will be pretty chaotic. It's probably impossible to both perfectly observe the market and to participate in it.

  • I recommend every aspiring trader have a read of A Mathematician Plays the Stock Market [amazon.com] by John Allen Paulos.

    The book is pretty much as it sounds. While the author doesn't *actually* invest in stocks, he *is* a mathematician and he plays through (mostly with logic) ways to get ahead in the stock market game. As you would probably guess, it's not easy.

    A great read. Sadly, my dreams of a quick fortune by computing stocks were quickly squashed by his well presented arguments.
  • Vectorvest [vectorvest.com] has been doing this for years. -ted
  • by espressojim (224775) <eris@NOsPam.tarogue.net> on Tuesday August 22, 2006 @09:03AM (#15954737)
    I have a friend who worked in the hedge fund game for a number of years. He's a brilliant mathematician, and worked on the models they used to inform their trading. The group he worked with was quite successful, and make a heck of a lot of money.

    One of his most interesting comments: "The model can inform your decisions, but you have to know when to NOT trust the model." Another of his comments on a completely different talk: "Mathematical models are never perfect, but they can be useful."

    The trading system can be modeled, but you can never capture all the true complexity of the real world. If you leave the model to do it's thing, if I know how it's going to act, I can game the system. If the world changes in a way that the model builders did not predict, then the system will also act inappropriately.

    I can't imagine ever getting rid of all the traders out there, though I imagine expert systems will become more 'expert' as time goes on.
  • A college friend has been doing this for the last few years with great success [mit.edu]. Go figure...
  • Thousands of people are simulatneously thinking about buy and sell decisions of the most-traded stocks. The stock price is a summation of all this thought. We can't even emulate the thinking of a single human. How on earth can anyone expect to predict what the summation of thought of several thousand people will be?

    That said, it is pretty easy to statistically spot deviations caused by "irrational exuberance". Even so, a computer betting against the "new economy" rally of the late 1990's would have su

  • So yes people are talking about using markets to predict terrorist attacks, or major weather events, etc. (Markets are reasonably good attractors of information.)

    And since the dawn of computers people have been searching for the magical program that could predict stock growth with enough accuracy that you give it a little money and retired to a tropical island.

    While a computer program might be able to match or beat the average investor in the stock market, that is only because publicly traded companies hav

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