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The problem with algorithmic trading is that markets are complex systems. As an algorithm is adopted, it changes the dynamics of the market, and the result the

The problem with algorithmic trading is that markets are complex systems. As an algorithm is adopted, it changes the dynamics of the market, and the result the assumptions it was based on tend to no longer hold. Note that humans trade via implicit algorithms, which is part of the reason why consistently outperforming the market is highly unlikely. In my opinion, the whole idea of investing to try and maximize profits is myopic. The real reason to invest should be to gain a measure of control over the corporation being invested in. This suggests that the board should play a more active role in the governance of corporations. People who just want to make a buck off a corporation should be limited to providing debt financing.

imaginenore 10y ago
Unless you're trading low volume penny stocks, or have hundreds of millions of dollars under your control, your trades will likely not affect anything. Considering that you need lots of data and high frequency, you will not be trading penny stocks with your [hypothetical] clever algorithm.
BickNowstrom 10y ago
Let's assume your algorithm moves the market: 1) This is not a big problem: Lots of machine learning and control theory involves dealing with feedback loops. 2) If it moves the market in a predictable way, you can use this to make money. The Western world is capitalist, not a Platonic ideal. Even if you strongly feel that people should have different reasons to invest, you will not be able to sway them (unless you can show that your alternative makes them even more money). If you claim that long-term outperforming of the market is highly unlikely, you contribute outperforming to short-time flukes: The stock market is essentially unpredictable or in perfect equilibrium. Unpredictability implies all these hedge funds would do better consulting random number generators, instead of well-paid quants. Equilibrium implies the current market is operating at maximum efficiency, yet one currently makes money by exploiting non-equilibrium and erroneous evaluations.
- CuriouslyC 10y ago
  Point #2 is what I'm talking about. Any algorithm that is going to make money long term on a large scale has to be inherently unpredictable, which is difficult if it is an algorithm that predicts the future state of the market from past data. Sure, the world is less than perfect in a lot of ways. In most cases we try and fix it. Why is capitalism the one way where we say "oh well, that's just how things are" ?? Research has demonstrated that barring insider information, random stock picking often outperforms "experts". I believe the market is fairly efficient, and people who make money are either lucky or are leveraging short term information differentials, which in today's hyper-connected society are going to become increasingly rare (barring insider information, again).

imaginenore 10y ago

Unless you're trading low volume penny stocks, or have hundreds of millions of dollars under your control, your trades will likely not affect anything. Considering that you need lots of data and high frequency, you will not be trading penny stocks with your [hypothetical] clever algorithm.

BickNowstrom 10y ago

Let's assume your algorithm moves the market: 1) This is not a big problem: Lots of machine learning and control theory involves dealing with feedback loops. 2) If it moves the market in a predictable way, you can use this to make money. The Western world is capitalist, not a Platonic ideal. Even if you strongly feel that people should have different reasons to invest, you will not be able to sway them (unless you can show that your alternative makes them even more money). If you claim that long-term outperforming of the market is highly unlikely, you contribute outperforming to short-time flukes: The stock market is essentially unpredictable or in perfect equilibrium. Unpredictability implies all these hedge funds would do better consulting random number generators, instead of well-paid quants. Equilibrium implies the current market is operating at maximum efficiency, yet one currently makes money by exploiting non-equilibrium and erroneous evaluations.

CuriouslyC 10y ago
Point #2 is what I'm talking about. Any algorithm that is going to make money long term on a large scale has to be inherently unpredictable, which is difficult if it is an algorithm that predicts the future state of the market from past data. Sure, the world is less than perfect in a lot of ways. In most cases we try and fix it. Why is capitalism the one way where we say "oh well, that's just how things are" ?? Research has demonstrated that barring insider information, random stock picking often outperforms "experts". I believe the market is fairly efficient, and people who make money are either lucky or are leveraging short term information differentials, which in today's hyper-connected society are going to become increasingly rare (barring insider information, again).