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Stock-Picking Computers 218

Posted by Zonk
from the finally-useful-math dept.
eldavojohn writes "A while ago, Slashdot ran an article on Algorithms used to augment or replace analysts. Today, the NY Times is running an article on stock-picking computers with quotes from the lovable Ray Kurzweil." From the article: "'Investment firms fall over themselves advertising their latest, most esoteric systems,' said Mr. Lo of M.I.T., who was asked by a $20 billion pension fund to design a neural network. He declined after discovering the investors had no real idea how such networks work. 'There are some pretty substantial misconceptions about what these things can and cannot do,' he said. 'As with any black box, if you don't know why it works, you won't realize when it's stopped working. Even a broken watch is right twice a day.'"
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Stock-Picking Computers

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  • Efficient markets (Score:5, Insightful)

    by Registered Coward v2 (447531) on Friday November 24, 2006 @10:40AM (#16974742)
    While the idea of stock picking algorithms is neat; market history suggest it won't work a a way to predict performance. What would be interesting is to better search for arbitrage opportunities to exploit faster than others. Of course, eventually others do the same and it becomes an arms race.
    • Re: (Score:3, Insightful)

      by $RANDOMLUSER (804576)
      The only thing an algorithm is guaranteed to do really well is join a panic and dump shares, thereby increasing the panic.
      • Re: (Score:3, Interesting)

        I doubt there are (m)any algorithms that trade like this. This behavior you recognize is actually a function of the way investing is set up. The fundamental problem is that most investments occur while leveraged (so you're trading on borrowed money). If you lose money past a certain point, every broker will demand that you fund your account to the proper level, usually back to the original ratio. Just about everybody trading with leveraged money does not have this extra capital lying around (they ought to b
    • by SpinyNorman (33776) on Friday November 24, 2006 @11:03AM (#16974982)
      It's quite possible that there's so much program trading going on, that you may be able to predict the market (not prfectly, but at least profitably) by effectively predicting what the program traders en-masse are doing. Not that this is necessarily any easier than predicting the mass psychology behind the markets in general, but it does as least point to the fact that much of the market moves according to very deterministic forces.

      Anyway, it's already being done, ergo it's possible!
      • by mcrbids (148650) on Friday November 24, 2006 @11:15AM (#16975114) Journal
        It's quite possible that there's so much program trading going on, that you may be able to predict the market (not prfectly, but at least profitably) by effectively predicting what the program traders en-masse are doing. Not that this is necessarily any easier than predicting the mass psychology behind the markets in general, but it does as least point to the fact that much of the market moves according to very deterministic forces.

        And this fact is EXACTLY what stabilizes the market!

        As soon as there's a discernable pattern, somebody's going to exploit that pattern in order to make more money, and as soon as that happens, the original pattern gets interrupted, thus stabilizing the marketplace. Perfect? No. But damned good. Some regulation is needed to keep these market forces from being overwhelmed - but the cost of this regulation is a pittance compared to the benefits gained!

        Money is an awfully effective invention for distributing wealth, which is why the Star-Trek "utopia" where nobody needs money is not going to happen anytime soon. So long as there is differentiation between different people (and thus resource distribution potential) there will be money.
        • by Shisha (145964)
          s soon as there's a discernable pattern, somebody's going to exploit that pattern in order to make more money, and as soon as that happens, the original pattern gets interrupted, thus stabilizing the marketplace. Perfect? No. But damned good.

          People seem to forget that stock prices do, at least occasionally, reflect reality. So the "original pattern" might not get interrupted. Imagine the classical example of company that pretend to have found gold. At some point the truth comes out and the stock price of th
          • Maybe once you have an AI engine that can crawl the internet and other news sources faster then humans, then you might be onto something.

            If you RTFA, this is exactly what they are doing/trying to do now.
        • by TheLink (130905)
          "Money is an awfully effective invention for distributing wealth"

          Yes, but it is even more effective at concentrating wealth.

          There are just so many cows and sheep you can accumulate and keep ;).
          • Re: (Score:3, Insightful)

            by khallow (566160)

            Yes, but it is even more effective at concentrating wealth.

            While you probably didn't intend it, that is one of the benefits of money and banking. Back two thousand years ago, almost no one could plan ahead 20 years except the wealthy. Any savings you might have accumulated could easily be stolen. IMHO, that was one of the reasons land was so valuable. Someone couldn't break in and take it and it still had use even if everything on it was destroyed. Now, anyone can concentrate wealth, not just the extrem

        • Re: (Score:3, Interesting)

          by meringuoid (568297)
          Money is an awfully effective invention for distributing wealth, which is why the Star-Trek "utopia" where nobody needs money is not going to happen anytime soon.

          The communist ideal of Star Trek, as I see it, is possible only because of the replicator.

          Consider what happens when it is possible, given an example of a given product, to duplicate it en mass at near-zero cost. Suddenly nearly everything's free. Manufacturing costs nothing, so it's all in the pattern that tells the replicator what to build. T

      • by ErroneousBee (611028) <neil:neilhancock.c o . uk> on Friday November 24, 2006 @11:51AM (#16975522) Homepage
        The technical name for this is Technical Analysis, and its a load of bunk.

        Sure you can create programs that handle arbitrage opportunities, or detect shortterm effects (market movements lasting less than 1 hour), and these make lots of money for those lucky people who have realtime prices and no brokerage costs (I.e. investment banks, etc).

        Stock prices for a company will move on news. Prices may drift around on speculation, but eventually a company will post its trading figures and you will know exactly how much that company is worth at that point in time. Unless these technical analysis programs know which comanies are moving product, who is about to sue who, which companies are in secret negotiations, what the future price of oil will be, etc, then they are going to miss price movements caused by events external to the markets.

        • by RKBA (622932)
          Exactly what I was thinking. In order to make any successful long term stock market predictions (days or months rather than minutes or hours), a model would have to incorporate worldwide Socio-political and economic modeling. Not likely to happen anytime soon methinks.
      • Trader 1: It's hit rock bottom. Come on, let's buy.
        Trader 1 (on the phone): Buy May belly contracts at...

        STOCKBOT:- That's a big mistake, Sir.

        Trader 2: Why shouldn't we buy now, STOCKBOT?

        STOCKBOT:- The price is going to keep going down.

        Trader 1: Randolph, this isn't Monopoly money we're playing with.

        Trader 2 (on the phone): This is Randolph. Hold that belly order a moment.

        Trader 2: Tell me why you think the price of pork bellies is going down.

        STOCKBOT:- It's Christmas time. Everybody
    • A study has already been performed to examine basic computer-stock picking based on all available (standard) market data and patterns. I forget who did the original study and am too lazy to look it up but it was covered in 'investment management' by Prof. Stephen Lofthouse. Basically, the programs do not beat the market, but lower the standard deviation (risk) involved in trading. The book recommends the programs are used and refined but states that they are nowhere near being able to be anything more than
      • Don't beat the market!! **Chortle, chortle** A have a good friend who works for a programmed trading firm. They make more than 15% year-on-year, some years substantially more, regardless of the direction of the market, consistently--not on average, consistently!--they've never had a down year, EVER. He's been there 15 years now.

        While he cannot say the nature of the programmed trading algorithms, he does not that all their best years are when the market goes DOWN, because their algorithms are better picking
      • Re: (Score:3, Informative)

        by Gorobei (127755)
        Basically, the programs do not beat the market, but lower the standard deviation (risk) involved in trading

        Um, that IS beating the market: all investments are a combination of risk and expected reward (e.g. treasuries are low-risk and low-return, junk bonds are higher risk and higher return.) If you can reduce risk without reducing return, you can make buckets of money (people will line up outside your door wanting to give you capital.)

        That said, don't trust any academic studies on this topic. There are
    • by bcrowell (177657)

      While the idea of stock picking algorithms is neat; ...
      The article is actually talking about at least two different different techniques:

      1. Using neural networks to spot unnoticed correlations between stocks.
      2. Finding more efficient ways to react to market news, e.g., by using AI to convert a news article into machine-readable form faster than a human can read it.

      Only the first one is really a stock picking algorithm.

      ...market history suggest it won't work a a way to predict performance.
      Or you coul

    • by vertinox (846076)
      While the idea of stock picking algorithms is neat; market history suggest it won't work a a way to predict performance.

      I sort of thought up how one would basically create such a program. You couldn't simply write one but you would have to "evolve" it.

      First take a computer program and have it randomly pick One million criteria from Google news. Then based off that criteria, randomly pick and choose a stock to buy or sell. Now repeat a few billion times. Then kill off the programs that fail to "virtually" ma
    • Re: (Score:3, Informative)

      by istartedi (132515)

      If the Efficient Market Hypothesis were true, stock pickers like Cramer should have been driven out of the market by now. Some investors do, on average, beat the market. See Warren Buffet. Now. The hard part is figuring out if your analyst is the next WB, or just some MBA who isn't too stupid and had good luck on top of not being too stupid... for the last 5 years until he regresses to the mean for the next 10 years. So. If you could write software that picked *analysts* then maybe you'd have somethin

  • by Silver Sloth (770927) on Friday November 24, 2006 @10:41AM (#16974752)
    to see stockbrokers being made redundant by machinery.
  • Quite futile (Score:2, Interesting)

    by Anonymous Coward
    Discssing this on /. is futile...

    Anyone who really knows anything about this subject wil not post. Too much going on in trading land...

    Hence AC post...
    • Re: (Score:2, Interesting)

      by Subcranium (1031578)
      >>Anyone who really knows anything about this subject will not post. ...The only sensible post I've read. I do this for a living, and have been for a while. Discussion is futile because systems traders won't say anything useful. We will say nothing, or we will try to mislead you. We are interested in the $$$ and not the bragging rights. You don't believe me and I don't give a damn that you don't. So this is the stupidest thread ever. I can't believe the dumb things I'm reading. My eyes are rolling s
    • I disagree. The most sensible advice can be freely given, because so few people will listen to it. Here is the advice:

      1) Don't try to beat the market through picking individual stocks.

      2) Buy only index funds. (An index fund is a completely transparent mutual fund that just buys what's in an index, such as the S&P 500, rather than relying on some "hotshot" fund manager who uses a proprietary screening process or something like that.) After fund fees, stock index funds* beat something like 80% of activ
  • by Thansal (999464) on Friday November 24, 2006 @10:49AM (#16974828)
    If you have a giant set of data, and you set a computer on it for long enough, it should be able to come up with some rather solid paterns/corelations/etc. You come up with these things, and if you don't have to wory about paying the stock broker what ever cut for each transaction (because you are the broker), then constantly trading on these thigns seems like agreat idea.

    However, it still can't predict things that a human can (yet). I doubt that a computer can incorporate thigns like global news, company announcements, and other such real world variables into how it makes judgments. That was the one thing that the article didn't really talk about.

    So I doubt we will see these "black boxes" replacing brokers, simply suplimenting them.
    • Re: (Score:3, Informative)

      by timeOday (582209)

      I doubt that a computer can incorporate thigns like global news, company announcements, and other such real world variables into how it makes judgments.

      Here's [psu.edu] a guy who incorporated yahoo message boards in his stock market prediction software a few years ago.

      Actually I was surprised how few references I could find to this sort of thing. Still I don't believe this is an indication that it's not happening; rather, I think market prediction is a black art because investors don't want anybody else to know

    • If I had to guess, I would say that NLP techniques are probably mature enough to take stories off a newswire and determine whether the story is good news or bad news for company X (with perhaps 80% accuracy). So, if your goal was to take advantage of jumps and dips caused by news before your competitors, you might have the computer make a few trades.

      [Note: the following example is based on my understanding of the stock market, which is most likely wrong]. For example, say you had 1000 shares of Google, cu
      • Re: (Score:3, Insightful)

        by greg1104 (461138)
        [Note: the following example is based on my understanding of the stock market, which is most likely wrong]

        Completely, but it's good that you know what you don't know--you'd lose a lot less money trading that way. It's impossible to parse stock news and figure out if it's good or bad. Using your example, if Google announces that it will exceed its previously projected earnings, it's just as likely the stock will crash as skyrocket. This is because market participants are working with earning estimation at
        • I certainly wasn't suggesting that this would be a promising route for an individual investor. In my mind, it would have required the ability to make transactions nearly instantaneously, and also relies heavily on statistical tendencies (which a big company would be in a better position to handle than a small company).

          I still have a hunch that it might be possible to do something in this field. Take product ship dates. While there may be occasions where announcing that you're going to let a deadline slip
          • by greg1104 (461138)
            So a revision upwards should be more likely to bump a stock than to tank it (though it might be a close thing).

            Market theorists love to point out with much amusement that a lot of things that seem like they would be strongly associated with a clear move in one direction turn out, after you analyze them properly, to be close to 50/50 that you can't trade on them usefully.

            It seems like first impressions would matter a lot in such cases. You know, simple metrics like "increased earnings == good", "layoffs == o
    • and other such real world variables into how it makes judgments.

      It also can't take into account stock-pumping spam, which has graced so many of our inboxes lately.
    • However, it still can't predict things that a human can (yet).

      People are really bad at predictions. Managed funds rarely even keep up with simple index linked funds.

      I doubt that a computer can incorporate thigns like global news, company announcements, and other such real world variables into how it makes judgments.

      No this really should be pretty simple. We already have an algorithm that can classify a message as spam or not spam with 99.5% + accuracy, basically good or bad. The same algorithm could be used to classify any news article as good or bad for a particular stock by looking at the direction the stock takes after the news appears. You could even train the classifier automatically by looking a couple of days

      • by greg1104 (461138)
        The same algorithm could be used to classify any news article as good or bad for a particular stock by looking at the direction the stock takes after the news appears. You could even train the classifier automatically by looking a couple of days in the past. Simply classify every single financial announcement against every single stock, eventually it'll get to the point that the classifier will be able to say that an announcement is 80% probably good news for this stock, 92% bad news for that stock.

        If you e
        • by Colin Smith (2679)

          urns out, people with much better information than me had driven the price up over the previous few weeks in the expectation that sales were actually going to be up 70%. The notion that you can compete with this sort of behavior after the news announcements has come out is at best a wonderful fantasy; at worst, you'll actually try to do it and get crushed.

          A single announcement wouldn't be used that way on it's own, it's simply a way to condense a text announcement down to probably good or probably bad, it m

          • by greg1104 (461138)
            A single announcement wouldn't be used that way on it's own, it's simply a way to condense a text announcement down to [an indicator]...The genetic algorithms which give too much or too little weight to the announcements will predict badly and fail to thrive.

            I guarantee you that if you put some serious time into this approach, you'd discover that the weight of any "announcement tone" indicator would end up so close to 0 that computing it in the first place would be a waste of time. Here's a better indicato
    • But if someone else uses the same algorithm and beats you to market on your trades by even a fraction of a second your information is outdated.

      If it was really possible to predict price behaviour on trading patterns these opportunities would be fully exploited until such a prediction would not work.

      Why not simply buy a good profitable company?
      Or a company that will be good and profitable?
    • by Mad Marlin (96929)
      The problem with trading on news reports is that by the time you read about it in the Wall Street Journal, that is, by the time a newspaper reporter is aware of it, the news is already factored into the stock price.
    • If you have a giant set of data, and you set a computer on it for long enough, it should be able to come up with some rather solid paterns/corelations/etc.

      That is an invalid assumption. The computer will only pick up solid patterns in the data if they are there to be found. If there is a solid (useful!) pattern in the market, a computer may pick it up. But the question of whether there are such patterns in financial markets is just as important (if not more so) as whether we can find them with a comput

    • by greg1104 (461138)
      If you have a giant set of data, and you set a computer on it for long enough, it should be able to come up with some rather solid paterns/corelations/etc.

      If by "solid" you mean "tradable" then no, it won't. It will produce what trading system developers refer to as a curve-fit trading system. When exposed to new market data, that type of system really doesn't work well at all.

      Think about this for a minute...how well would a trading system trained on data about the .com boom work in today's market? How w
  • I wonder whether there are Open Source or Free-to-use programs to trade currencies. I tried once and got "burned" hard...almost lost everything!

    Most companies provide free trading stations but the tools/software to predict what might happen in the market cost thousands of dollars, yet these tools are never 100% accurate. So, does anyone know where one can grab Open Source versions of these? Thanx.

    • Re: (Score:3, Informative)

      The system you are looking for is Genius Trader [geniustrader.org].

      However, while it's fun to play around with a system like this, I must warn you that the realities of trading make it very hard to profit even if it looks good on paper. You probably know this, since you "got burned" before. Make sure you consult a professional before investing, or I can pretty much guarantee that you'll get burned again.

    • Really, if you don't know what you're doing then you are the prey. I don't, and I recognise I'd get eaten by the big guys. Better idea to take up a known to work investment strategy and invest for the longer term. You can still beat the market average and the bank savings rates but you won't be making 100% per day.

      There are several very simple to manage portfolio strategies which will give you very good returns whether the markets are going up or going down and with little risk. It's not magic, it's common
      • by bogaboga (793279)
        There are several very simple to manage portfolio strategies which will give you very good returns whether the markets are going up or going down and with little risk. It's not magic, it's common sense, long term investing and frankly a bit dull.

        Care to post a link? Thanks.

        • Re: (Score:3, Interesting)

          by Colin Smith (2679)

          Care to post a link? Thanks.

          sure.
          http://www.npr.org/templates/story/story.php?story Id=6203264 [npr.org]

          My own portfolio is a bit simpler. UK index linked mutual fund, developing country mutual fund, government bonds, commodities (gold silver), housing stocks. Basically about 20% in each sector. Try to spread your portfolio over several sectors which don't all go in the same direction at the same time.

          The strategy is simple but it's the important bit because it stops you buying at the top of the market. It's called rebalancing.

          Every month add t

        • by abigor (540274)
          Buy the book called "The Best Little Guide to Stock Market Investing" from Amazon, open a trading account at an online discount brokerage, and you're off.
      • by geekoid (135745)
        Actually, if you cuold tie into the same databases for exchange rates, and move your money with the same speeds as the large players do, you could probably do all right.

        Of course, if you could tie your money on a small scale to the movements of the top players you could do damn good.

        Sadly, this technology isn't consumer available.

  • It Works (Score:2, Informative)

    by SRA8 (859587)
    Forget quotes about neural networks, program trading WORKS. Firms like Goldman Sachs have pulled in hundreds of millions in profits with program trading and will likely continue to do so. Its about replicating human trader behaviours, except with lightning-sharp reflexes.
    • People who say its too volatile and not logical are wrong...

      If you have level 2 access, you can pretty accurately predict where a stock is going. Sure, you don't know from day to day, but there are reasons for market introduced delays and market makers.
    • Re:It Works (Score:4, Insightful)

      by OneSmartFellow (716217) on Friday November 24, 2006 @11:11AM (#16975078)
      That's not the same as automated stock picking.
      Automated trading systems 'generally' are used to take a position in a stock that has already been picked.
      So, trader A in Goldman Suchs wants to take a long position (buy) 100K shares of IBM, so he assigns that trade to the algorithmic trading engine, which might offer him various algorithms to help fulfill his position at the best possible price, ranging from %vol, VWAP, 'iceberg' or other type of algorithm.

      notice, though, that the trader already had the stock to trade chosen, he didn't let the algorithmic engine choose it for him.
  • by bennomatic (691188) on Friday November 24, 2006 @11:03AM (#16974984) Homepage
    There are so many theoretical problems with automated stock picking systems that I could spend all day working on this post. Instead, I'll ignore all but two.

    First, no matter how well you can predict based on patterns, when you are picking individual stocks, there is such a huge influence from the chaos of human nature that, from day to day, no matter how appropriate your predictions are (based on history), they may have nothing at all to do with reality.

    Additionally, if you get enough of these stock picking systems in operation, they can actually change the dynamics of the market, keeping them from being accurate for years as they all try to account for the activities associated with each others' predictions.

    The problem with stocks is that in order to know how they are going to perform, you have to know not only what the company is going to do and how their customers are going to respond, but also how the investing public is going to take that news. It's an odd mix of fundementals and faith, in my experience.
  • by argoff (142580) * on Friday November 24, 2006 @11:05AM (#16975006)
    While there are probably measurable patterns. Many aspects of a market are choice based. For example, today central bankers are in a real bind. If they raise rates, it could crash housing and the whole economy with it. If they lower rates, there could be a panic out of the dollar to currencies that offer a higher return on interest rates. Once that move starts, than even investments that don't do anything at all (like gold) will rocket, making the panic even worse. In the end a human is making those choices at the helm, and a only a human can have the intuitive understanding that you better buy gold (but not on margin), even if it looks like a crappy investment. Another thing, if someone knows that the computer reads pattern X Y Z as a sell, then they might try to force the stock price to make that pattern against the market to force a computer sell and get in on it at a good price.
  • There's moneybee: http://uk.moneybee.net/ [moneybee.net] or maybe wealthlab http://www.wealth-lab.com/ [wealth-lab.com]

    Or you could try genetic algorithms, download the info on the whole market plus historical info, give the algorithms access to the lot, plus downloaded financial news, classify the financial news as good or bad for a stock using a bayesian classifier, add that to the pot and then use evolution to see which algorithms survive best in the market to date.

    You may need to build a supercomputer to run enough algorithms to perfo
  • by plover (150551) * on Friday November 24, 2006 @11:15AM (#16975122) Homepage Journal
    I hate to be so mean, but anyone who turns down a job from a fund with $20 billion dollars is just not smart. He could have milked that for 20 years! He could be pouring grant money over his breakfast cereal right now, but "oh, no, sorry, but that's not technically feasible." Fool. ANYTHING can be made to sound technically feasible for the right amount of money.

    [ Yes, I am joking. I'm quite sure Mr. Lo is brilliant -- just maybe a touch too honest. :-) ]

    • by cperciva (102828) on Friday November 24, 2006 @11:41AM (#16975420) Homepage
      [ Yes, I am joking. I'm quite sure Mr. Lo is brilliant -- just maybe a touch too honest. :-) ]

      You're assuming that he cares about earning lots of money. More likely, he has enough money, and he wants to do work which he finds interesting -- in other words, he's not turning down the offer because he's honest; he's turning down the offer because he doesn't want to waste 20 years of his life.
      • by plover (150551) *

        [ Yes, I am joking. I'm quite sure Mr. Lo is brilliant -- just maybe a touch too honest. :-) ]

        You're assuming that he cares about earning lots of money.

        Wrong! I'm assuming nothing. I'm telling a fracking joke, and everyone here took it waaaay too seriously! I said, "I am joking." You even quoted me above saying, "I am joking."

        OK, so I want everyone who posted a reply to my comment thinking I was serious (and that includes the moderators who modded this up as insightful) to stand up and take thi

  • Anybody remember Long-Term Capital Management? [wikipedia.org] They were a hedge fund, heavy with experts, even had a Nobel Economics Laureate on their team. They lost 4.6 billion dollars in four months time, having to be bailed out by the big banks to prevent them from crashing the whole market. PBS (I think Frontline) did a documentary on the whole thing. Fascinating stuff - I wish I could find a link for it.
    • by $RANDOMLUSER (804576) on Friday November 24, 2006 @11:34AM (#16975334)
      Found it: it was Nova: "Trillion Dollar Bet". Here's [pbs.org] the transcript.
    • by hughk (248126)
      One of the key problems of LTCM was slippage, that is the lag between needing to trade and the execution. Slippage can be caused by speed of access to the market (not an issue for LTCM, but a problem for those who do not have direct or near dircet access to the market) and also liquidity. Your algorithm may tell you that you need to buy a secutrity, but there aren't enough to buy so the price jumps too quickly.

      Note that LTCM had privileged market access with effective direct backing from major banks. That

  • Let's see... we want to design a neural net that predicts the summed trading behavior of, oh, several tens of millions of human brains? Beyond the obvious hardware scaling problems, we must think of the software used by these brains, each of which has different biases for selecting stocks. Some choose based on omens they call 'fundamentals'. Some choose based on some form of scrying on the shapes of squiggles of price history charts. Some trade decisions are made on how the trader's 'gut' happens to fee
    • by vertinox (846076)
      Let's see... we want to design a neural net that predicts the summed trading behavior of, oh, several tens of millions of human brains?

      I hate to say this, but you give the human race too much credit. Those tens of millions of human brains tend to think in herds. Often to the chagrin of the hand full of people who sell short and make a profit.

      Playing the stock market is like out running hungry grizzly bears. You don't need to faster than the bear (the market) but you do need to be faster any one else with yo
  • by 12357bd (686909) on Friday November 24, 2006 @11:32AM (#16975316)

    The last work of Mandelbort (the 'fractals' father) 'The (Mis)behaviour of markets' http://www.amazon.com/Misbehavior-Markets-Benoit-M andelbrot/dp/0465043550/ [amazon.com] is quite interesting.
    Sigh, markets are chaotic, much more chaotic than current market analisis states.

  • by Alioth (221270)
    It's odd how online poker is illegal in the United States, but the stock market (which is largely just gambling) is not.
    • by hughk (248126)
      The stock market isn't just gambling. At least, in theory you are buying a 'piece' of the action. What is a gamble are derivatives. In fact you will find that some derivatives really are being sold by bookmakers, say spread bets.
  • This is the last thing that's holding me back from adopting Linux. If it came with stock pick software, I would use it.
  • In theory, making money in stock market should be easy. Buy low, sell high is a guaranteed successful investment strategy and yet few people follow it. Why is that? By definition, an undervalued stock is an unpopular stock. Doing the unpopular thing is very difficult. Quite simply, human beings are a social animals and going against the crowd is often not in our best interest. Investing in unpopular stocks almost always feels wrong.

    However, if you take a rational look at popular and unpopular stocks, you

    • by geekoid (135745)
      which is exactly why large stock money makers pay people to get on a stock BEFORE the general public view it as rosy.

      Something that was easier to do 10 years ago then today.

    • The problem with buying low is that some companies do go out of business and the stock becomes worth zero. Others get bought out at a low price (you don't always have the opportunity to say "I won't sell at that price.").

      If the price stays flat you lose against "inflation".

      You need to do much more analysis than say "This stock's price is low, it's time to buy."

      Vitesse (VTSS) got to over $100. You could have later bought it for the bargain price of $10. The most recent close was $1.20.

  • by bigberk (547360) <bigberk@users.pc9.org> on Friday November 24, 2006 @02:04PM (#16976936)
    First of all, the article summary seems a bit misleading because people might think we're talking about "stock picking" as in analyst opinions/monkeys picking stocks. That's not so, this is about software driven trading. Often this is of a very short term nature, so in a way the growing use of program trading is the "new day trading" fad.

    In the industry it's called "program trading" and refers to automated, algorithmic trading of instruments such as stocks, futures, forex. This is regularly done by many banks and large funds, and also small investors. In fact there is a discount brokerage which I'll just call IB here, that has an API which lets anyone program their own computerized trading. It's a bit "too easy" to do.

    That doesn't mean it's always profitable in the long term, but without a doubt people are profiting at least in the short term. The software has multiple strategies, well documented approaches and algorithms. Generally the trading robot is trying to ride trends.

    As someone who follows these things, here are a few criticisms I'm aware of:

    1. These short term trading activities require high leverage, because trades have to be for large amounts of money to make them worthwhile. You need large amounts of money to make this work, because things like trading costs eat into profits tremendously. Again, like day trading.

    2. High leverage is risky because one big mistake or unpleasant event could wipe out tons of past small gains. Risk management becomes a key issue. Some would argue that perceived risk in markets these days is unreasonably low. Does this unbalance the risk/reward equation?

    3. Market-wide, we know program trading has increased dramatically on US exchanges. Add to this the undocumented program trading (smaller traders who don't have to report it to anyone) and basically there are a ton of computer algorithms out there today trading stocks. Everybody can't make money at the same time, so to profit the participants have to use even greater leverage = more risk.

    4. Programming flaws, bugs, or improper risk management could have tremendous market-wide implications. Take for example the huge market moves in 1987; the drop was a "20-sigma" event and not anywhere within the realm of possibility back then. Obviously the models failed to handle it. Similarly, the next time we have a "big event" in markets, today's algorithms might fail. If a large number of computers choke while trading, could bad things happen?

    5. So under unstable market conditions, the program trading could lead to increased volatility (like daytrading caused volatile markets during the crash). But under stable market conditions, like we have today, program trading seems to smooth out daily movements. Notice that the US markets hardly move as much as 1% in a day; trends are smooth and volatility is extremely low. The VIX, a volatility measure, has hit historic lows.

  • If you think about the number of symbols being tracked from the key exchanges, we have over 250,000. A publish an subscribe system usually bottoms out at 20,000 topics. (In the old days, SmartSockets had trouble with 2,000.)

    The number of events/updates comming through, at least 7 years ago, was about 800 every second. That's a lot of information.

    So, what can we do with that much information that is updated so frequently?

    Well, implementing time and sales for just transactions takes lots of disk space. Gi
  • by Duncan3 (10537) on Friday November 24, 2006 @04:37PM (#16978226) Homepage
    You didn't think the 370 Trillion in derivatives was traded by humans did you?

    Of course, the entire planet's GDP is only 60 trillion, so even a little mistake means complete global meltdown.

    .

Mathemeticians stand on each other's shoulders while computer scientists stand on each other's toes. -- Richard Hamming

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