Man vs Machine on Wall Street: How Computers Beat the Market

[Andy Nguyen]

By William D. Cohan
Wall Street, meet your post-human future. Uber-"quant" Cliff Asness bets that his high-speed computers and trading models can churn billions of dollars in profits in booms and busts alike. But can artificial intelligence really out-smart the market?

With the winter's second blizzard raging outside, Cliff Asness sat in his relatively modest office in Greenwich, Connecticut, surrounded by three of his partners, his PR guru, an impressive collection of unread books, and a sea of foot-tall hard-plastic replicas of Spiderman, the Incredible Hulk, and friends. "Let me be technical," he said. "It all sucked."

Asness--intense, bald, and bearded, with a $500 million fortune and a doctorate in finance--was reflecting on the dark days of 2008, when capitalism seemed to be imploding, when Bear Stearns and Lehman Brothers had collapsed and the government had hastily arranged bailouts of Merrill Lynch, Morgan Stanley, Goldman Sachs, and AIG, among others.

His own business, Applied Quantitative Research--one of the world's leading quantitative-investment, or "quant," funds--had also suffered painfully. The money his team managed fell to $17.2 billion in March 2009, from a peak of $39.1 billion in September 2007, as clients headed for the exits with what was left of their cash.

http://www.theatlantic.com/business/print/2011/03/man-vs-machine-on-wall-street-how-computers-beat-the-market/73120/

 

[Connor]

Good read, thanks Andy!

 

[TBeas]

Good story.

 

[AZPalta]

I agree.
Sidenote: When I first read this story last night I thought I saw an image of a Bull as part of the article. Now as I re-read it, the image is of 2 traders at BarCap... Don't know why they changed it or how that image relates (or maybe my mind is just playing tricks on me)

 

[Eugene Krel]

it was a bull earlier today too.

the author should have used the word "quant" a few more times.

 

[Andy Nguyen]

Yeap, it was a bull when I posted it. The webmaster in me thinks the reason they change the image is because the bull loads very slowly. It looks like they use a very large image and tried to scale the image to fit the article so it loads very slowly.

 

[Yike Lu]

I liked the article, but this quote was rather overblown:
"Envision a world where artificial intelligence could vanquish human trading altogether."

People who state these things don't stop and think about why markets exist in the first place. Perhaps algos will dominate executions, but in the end, quant/automated trading on the buy side is very small. Most people still make their trading decisions manually...

 

[Tsotne]

I liked the article, but this quote was rather overblown:
"Envision a world where artificial intelligence could vanquish human trading altogether."

People who state these things don't stop and think about why markets exist in the first place. Perhaps algos will dominate executions, but in the end, quant/automated trading on the buy side is very small. Most people still make their trading decisions manually...

Not that unimaginable...

 

[DominiConnor]

One has to be careful about what you call "automatic trading", which I shall compare to weapons of varying destruction

Some imagine the Terminator, I know my son does. He's 9
A fully autonomous entity, which is unknown in either the art of war or the craft of trading.
Arts grads in the media believe this is the norm, I know this because next week the BBC is transmitting an interview with me on this subject where I explain the entire industry, mathematics, technology, regulation, economics, risks, major players, the political framework in Europe, and algotrading's future development in 4 minutes 17 seconds. You might be surprised to learn that I don't entirely succeed.

Next down we have the Aegis class of destroyer.
Modern missiles can only be defended again by systems that work at timescales below which humans can function, nowadats shooting down a cannon shell in flight is feasible. You try doing that by hand see how far you get.
You basically say "fuck, look there's a missile, you sort it out", and it kills it for you, or it kills an Iranian airbus full of people, win some lose some.
They also can be configured to trigger on detection of an incoming and tell you later what they did about it.
That's a moderately common level of algotrading, you define triggers and as fast as a confection of FPGA, GPU, C++ et al can react they shoot at "wrong" prices, hoping to kill some for you dinner.

Then there's smart bombs, you define a target and the general direction in which it is to be found and the 486 (yes really) does all the hard work of working out how to get it there.
Fact is that if you want to execute a block of trades, you're probably not wise to work the exact timing and lot size by hand or worse still by "intuition". An algo will time and size it for you, and do the heavy lifting of placing the orders and tracking the fills.

Then there's head up displays which project onto your windscreen, 'suggesting' where you might like to shoot next, and offering guidance on which order you might like to engage them.
That's the level we can achieve in human time with Excel and a bit of C++

Lastly there is a drunken fool with a machine gun.
or a "long only equity fund manager" as they are more politely called.