9 ms·

AI That Picks Stocks Better Than the Pros

86 points by pier0 16y ago

bmf 16y ago
nit picking, but many of the words listed (such as "smaller" and "crude") aren't verbs.
- georgieporgie 16y ago
  From the article: > (In his work, 'verb' is a technical term, and does not exactly correspond with the conventional definition of the word.)
jrockway 16y ago
I'd like to see what this looks like when run on bond derivatives from the early 2000s. I wonder if it would have been able to foresee the subprime crisis better than the big investment banks. (My theory, as someone involved in the industry, is that emotion dictates 90% of whether or not someone is going to make a trade. This is why nobody noticed how bad the subprime bonds / CDOs were -- they bought them, so they must be good. I feel the same way about my telephone and keyboard ;)
b0b0b0b 16y ago
They don't detail the number of trades nor do they account for commissions or slippage.
- larsberg 16y ago
  And it's all simulated. Last I heard, placing orders affects the market, especially if you're working with more than a toy account.
  - joshu 16y ago
    It totally affects the market.
    - mikeklaas 16y ago
      As in, 'it affects the entire market' or 'all of it affects the market'?
      - joshu 16y ago
        I was just agreeing vigorously with him.
  - arthurdent 16y ago
    depending on the strategy, its possible to build reasonable simulations of the affect your trades will have on the market, though the data you need to do so is harder to get and a lot more expensive. but for a strategy like the one described it'd be reasonable to take the existing market and assume that you could pay offers, hit bids, and maybe build in a little slippage to get a reasonable simulation. academics though, typically don't care as much about simulating for transaction costs because they're more interested in perceived mispricing in the marketplace as an interesting economic/intellectual phenomenae. Frequently academic papers will assume a 1-price world where the 1-price is midmarket and build the model off that. If the market were indeed entirely efficient, then the described trade wouldn't be better than chance even with no transaction costs or bid-ask.
bh42 16y ago
Don't index funds and completely random selections ALSO outperform most professional stock pickers?
- GFischer 16y ago
  Here's an answer: http://www.studyfinance.com/jfsd/pdffiles/v8n1/liang.pdf http://www.studyfinance.com/jfsd/pdffiles/v8n1/liang.pdf Apparently the random stocks outperform the "pros" picks after 6 months (the pros have the edge in the short term) Actual quote from the study: "Results suggest that the pros selection statistically outperforms the random selection only in the one-week period. Over a six-month holding period, the random stocks perform better than the pros recommendations."
rauljara 16y ago
My understanding of why the stock market is supposed to be good for society is that it encourages investors to invest in companies that need more capital. It has the nice side effect of allowing people to buy high value assets that are likely to increase in value over time, letting people save for their retirements, while simultaneously providing capital to companies that may need it. I fail to understand how a computer that holds on to stocks for < 20 minutes forwards either of those goals. Maybe someone can explain why this is a good thing to me, but this really seems like a perversion of what free markets are supposed to be good for. And again, maybe someone can explain why this would be a bad idea, but I'd really like to see a system where if you buy a stock you are not allowed to sell it for a fixed period of time that would be measured in months, and not seconds.
- hugh3 16y ago
  Market making. Suppose I decide I want to buy 3000 shares of IBM right now. I'll have made the trade within minutes, because I'll probably have bought it from a computer which holds shares for twenty minutes. Four years later, when I want to sell, I can sell it within minutes too, because I'll be selling it to another computer that will probably sell 'em off to a series of other computers, before eventually winding up in the pocket of another long-term investor. If long-term investors were the only ones buying and selling shares it would be much more difficult to buy and sell shares when you wanted to. Net result: shares are a less attractive investment, IPOs raise less, economy suffers.
  - solutionyogi 16y ago
    I would call it 'Liquidity'. And there are instruments where you are locked in for certain period of time e.g. 10 year treasury bonds. Luckily, there is an after market for treasury bonds where you can sell them after buying well before the 10 years are over. And what you are proposing is that we should only allow Investing and restrict/remove trading. The problem with this approach is that you lose your ability to find 'market value' for your investment on an everyday basis. Let's say we force everyone to hold stock for at least a month. What if I had bought BP stock just before the gulf oil spill news came out? I will be stuck and would have to incur a huge loss by the time I am allowed to sell my stock. Also, there are thousands of investors and they may need to liquidate their position at any time based on their own circumstances. And finally, stock market does achieve their goal of allowing company to raise capital. Theoretically, it doesn't matter what happens to the stock price after company has issued their common stock. They got their capital and can do what they want with it. On practical basis, company do care about their stock price for numerous reasons which I won't get into right now.
breck 16y ago
> Using data from five non-consecutive weeks in 2005, a period chosen for its lack of unusual stock market activity, here's how AZFinText performed versus funds that traded in the same securities (which were all chosen from the S&P 500): This is silly. It's quite easy to generate an algorithm that would perform similarly. I wonder how it would have performed had it been run across the entirety of 2005 (or any year for that matter), and not just during cherry picked weeks.
- hugh3 16y ago
  Yes, I'd like to see it run across the entirety of the available data. Also, if I came up with a method like this, and I actually had evidence that it worked, I'd be patenting it and selling it to an investment bank for very large sums of money before I published the details.
  - khafra 16y ago
    Anthropic bias: The other thousand programmers that came up with such an algorithm used it or sold it to an investment bank; this is the first one that published instead.
Periodic 16y ago
I read the title as "AI that picks socks better than the pros". I was very intrigued. As I waited for the link to load I mused about what a damning report this must be for the fashion industry. Can a computer really out fashion the fashionistas? Alas, it was not so. The fashion elite are still unassailable in their fortress of subjectivity.
- sp332 16y ago
  >I mused about what a damning report this must be I think you mean darning.
theli0nheart 16y ago
> Using data from five non-consecutive weeks in 2005, a period chosen for its lack of unusual stock market activity Doesn't this completely invalidate the results of this test? Compare with: I've developed a system for testing whether or not any given number is prime. Using data from the numbers 5, 7, 11, and 17, ...
- wheaties 16y ago
  You know, it makes MUCH better news if the software is a whizz-bang than if it lost you a crap-ton instead.
- jgoewert 16y ago
  That was my first thought as well. Actually my first thought was: In the other consecutive weeks, the system lost its shirt and jumped out the window.... twice.
- jfno67 16y ago
  Also the effect of the system trading is not factored in. If low capitalization or low volume stock were used than the result would not have been as positive. You have to do the the trade otherwise you just get a nice system for collective2.com
aresant 16y ago
Catch 22 - if this system is popularized, it will change the way stocks are traded, and in the process will damage its own value by destroying the control index.
Eliezer 16y ago
Shouldn't there be some way to flag stories as "headline is obviously false"?
- rms 16y ago
  I believe it has been discussed by pg as part of a proposed revamp to the flagging system. It'll happen eventually.
obsaysditto 16y ago
The research paper, which is a pretty good read, can be found here http://www.robschumaker.com/publications/IEEE%20Computer%20-%20A%20Discrete%20Stock%20Price%20Prediction%20Engine%20Based%20on%20Financial%20News.pdf http://www.robschumaker.com/publications/IEEE%20Computer%20-... [pdf]
mkramlich 16y ago
here's one in Python: import random stocks = (ibm, apple, ...) stock_to_buy = random.choice(stocks)
PassTheAmmo 16y ago
So if I made a system that traded automatically and I was convinced that it would beat the market, how would I go about connecting it to the stock exchange? What costs would there be?
- desponsible 16y ago
  Something like this - http://www.interactivebrokers.com http://www.interactivebrokers.com
MikeCapone 16y ago
I wonder how well covered their downside is. Will a black swan make it blow up spectacularly, negating any previous gains?
cameldrv 16y ago
These types of systems are now common in the market, and you need more sophisticated algorithms to make any money. They said that they picked 2005 because it had a lack of "unusual market activity." I bet they picked it because their system didn't work in later years, because there's too much competition to make money with their system now.
deleted 16y ago
[deleted]
kurumo 16y ago
I work in this field. That is not the first paper written about this system; the previous was "Sentiment Analysis of Financial News Articles", Schumaker et. al. This is not the only academic project describing something like this, see papers by Mittermayer and Lavrenko for other examples. Short summary of the results is basically this: you would have to be insane to trade purely on output of a system like this. There are multiple issues with this, the primary being that most of these systems do not and cannot distinguish documents leading the trend from those lagging the trend. Furthermore, to actually be able to trade on the indicators derived from news you need to encode the market expectation into your model, which is a separate (and difficult) problem. The margins these systems produce in simulated trading are small, and for some reason nobody takes transaction costs into account. This is not to say that systems like this do not exist in the real world - they certainly do, but the people that build and/or use them generally will not discuss the details, for obvious reasons.
naner 16y ago
Not really surprising. This been done before to some degree by Kurzweil and Schmidhuber and I'm sure others.
- desponsible 16y ago
  Any pointers?
  - naner 16y ago
    Be really smart? No way in hell could I do this. You need a strong math, statistics, and machine learning background to begin with.
jheriko 16y ago
"Computer programs can gamble better than gamblers" Sorry to say, but I'm completely unsurprised by this - statistical analysis is the most sensible approach to the problem. Gamblers tend to be less sensible and calling a gambler a stock market trading pro doesn't stop him being a gambler... I'd also be wary of labeling pros in a system which will naturally produce "lucky" and "unlucky" individuals regardless of skill... at least some proportion of successful traders are just lucky. I can't measure it, but it seems very heavily implied...
Maven911 16y ago
I have a question for all of you...how do so many of you know a lot about financial markets and finance...I made an Ask HN about it: http://news.ycombinator.com/item?id=1422453 http://news.ycombinator.com/item?id=1422453

86 points by pier0 16y ago

bmf 16y ago

nit picking, but many of the words listed (such as "smaller" and "crude") aren't verbs.

georgieporgie 16y ago
From the article: > (In his work, 'verb' is a technical term, and does not exactly correspond with the conventional definition of the word.)

jrockway 16y ago

I'd like to see what this looks like when run on bond derivatives from the early 2000s. I wonder if it would have been able to foresee the subprime crisis better than the big investment banks. (My theory, as someone involved in the industry, is that emotion dictates 90% of whether or not someone is going to make a trade. This is why nobody noticed how bad the subprime bonds / CDOs were -- they bought them, so they must be good. I feel the same way about my telephone and keyboard ;)

b0b0b0b 16y ago

They don't detail the number of trades nor do they account for commissions or slippage.

larsberg 16y ago
And it's all simulated. Last I heard, placing orders affects the market, especially if you're working with more than a toy account.
- joshu 16y ago
  It totally affects the market.
  - mikeklaas 16y ago
    As in, 'it affects the entire market' or 'all of it affects the market'?
    - joshu 16y ago
      I was just agreeing vigorously with him.
- arthurdent 16y ago
  depending on the strategy, its possible to build reasonable simulations of the affect your trades will have on the market, though the data you need to do so is harder to get and a lot more expensive. but for a strategy like the one described it'd be reasonable to take the existing market and assume that you could pay offers, hit bids, and maybe build in a little slippage to get a reasonable simulation. academics though, typically don't care as much about simulating for transaction costs because they're more interested in perceived mispricing in the marketplace as an interesting economic/intellectual phenomenae. Frequently academic papers will assume a 1-price world where the 1-price is midmarket and build the model off that. If the market were indeed entirely efficient, then the described trade wouldn't be better than chance even with no transaction costs or bid-ask.

bh42 16y ago

Don't index funds and completely random selections ALSO outperform most professional stock pickers?

GFischer 16y ago
Here's an answer: http://www.studyfinance.com/jfsd/pdffiles/v8n1/liang.pdf http://www.studyfinance.com/jfsd/pdffiles/v8n1/liang.pdf Apparently the random stocks outperform the "pros" picks after 6 months (the pros have the edge in the short term) Actual quote from the study: "Results suggest that the pros selection statistically outperforms the random selection only in the one-week period. Over a six-month holding period, the random stocks perform better than the pros recommendations."

rauljara 16y ago

My understanding of why the stock market is supposed to be good for society is that it encourages investors to invest in companies that need more capital. It has the nice side effect of allowing people to buy high value assets that are likely to increase in value over time, letting people save for their retirements, while simultaneously providing capital to companies that may need it. I fail to understand how a computer that holds on to stocks for < 20 minutes forwards either of those goals. Maybe someone can explain why this is a good thing to me, but this really seems like a perversion of what free markets are supposed to be good for. And again, maybe someone can explain why this would be a bad idea, but I'd really like to see a system where if you buy a stock you are not allowed to sell it for a fixed period of time that would be measured in months, and not seconds.

hugh3 16y ago
Market making. Suppose I decide I want to buy 3000 shares of IBM right now. I'll have made the trade within minutes, because I'll probably have bought it from a computer which holds shares for twenty minutes. Four years later, when I want to sell, I can sell it within minutes too, because I'll be selling it to another computer that will probably sell 'em off to a series of other computers, before eventually winding up in the pocket of another long-term investor. If long-term investors were the only ones buying and selling shares it would be much more difficult to buy and sell shares when you wanted to. Net result: shares are a less attractive investment, IPOs raise less, economy suffers.
- solutionyogi 16y ago
  I would call it 'Liquidity'. And there are instruments where you are locked in for certain period of time e.g. 10 year treasury bonds. Luckily, there is an after market for treasury bonds where you can sell them after buying well before the 10 years are over. And what you are proposing is that we should only allow Investing and restrict/remove trading. The problem with this approach is that you lose your ability to find 'market value' for your investment on an everyday basis. Let's say we force everyone to hold stock for at least a month. What if I had bought BP stock just before the gulf oil spill news came out? I will be stuck and would have to incur a huge loss by the time I am allowed to sell my stock. Also, there are thousands of investors and they may need to liquidate their position at any time based on their own circumstances. And finally, stock market does achieve their goal of allowing company to raise capital. Theoretically, it doesn't matter what happens to the stock price after company has issued their common stock. They got their capital and can do what they want with it. On practical basis, company do care about their stock price for numerous reasons which I won't get into right now.

breck 16y ago

> Using data from five non-consecutive weeks in 2005, a period chosen for its lack of unusual stock market activity, here's how AZFinText performed versus funds that traded in the same securities (which were all chosen from the S&P 500): This is silly. It's quite easy to generate an algorithm that would perform similarly. I wonder how it would have performed had it been run across the entirety of 2005 (or any year for that matter), and not just during cherry picked weeks.

hugh3 16y ago
Yes, I'd like to see it run across the entirety of the available data. Also, if I came up with a method like this, and I actually had evidence that it worked, I'd be patenting it and selling it to an investment bank for very large sums of money before I published the details.
- khafra 16y ago
  Anthropic bias: The other thousand programmers that came up with such an algorithm used it or sold it to an investment bank; this is the first one that published instead.

Periodic 16y ago

I read the title as "AI that picks socks better than the pros". I was very intrigued. As I waited for the link to load I mused about what a damning report this must be for the fashion industry. Can a computer really out fashion the fashionistas? Alas, it was not so. The fashion elite are still unassailable in their fortress of subjectivity.

sp332 16y ago
>I mused about what a damning report this must be I think you mean darning.

theli0nheart 16y ago

> Using data from five non-consecutive weeks in 2005, a period chosen for its lack of unusual stock market activity Doesn't this completely invalidate the results of this test? Compare with: I've developed a system for testing whether or not any given number is prime. Using data from the numbers 5, 7, 11, and 17, ...

wheaties 16y ago
You know, it makes MUCH better news if the software is a whizz-bang than if it lost you a crap-ton instead.
jgoewert 16y ago
That was my first thought as well. Actually my first thought was: In the other consecutive weeks, the system lost its shirt and jumped out the window.... twice.
jfno67 16y ago
Also the effect of the system trading is not factored in. If low capitalization or low volume stock were used than the result would not have been as positive. You have to do the the trade otherwise you just get a nice system for collective2.com

aresant 16y ago

Catch 22 - if this system is popularized, it will change the way stocks are traded, and in the process will damage its own value by destroying the control index.

Eliezer 16y ago

Shouldn't there be some way to flag stories as "headline is obviously false"?

rms 16y ago
I believe it has been discussed by pg as part of a proposed revamp to the flagging system. It'll happen eventually.

obsaysditto 16y ago

The research paper, which is a pretty good read, can be found here http://www.robschumaker.com/publications/IEEE%20Computer%20-%20A%20Discrete%20Stock%20Price%20Prediction%20Engine%20Based%20on%20Financial%20News.pdf http://www.robschumaker.com/publications/IEEE%20Computer%20-... [pdf]

mkramlich 16y ago

here's one in Python: import random stocks = (ibm, apple, ...) stock_to_buy = random.choice(stocks)

PassTheAmmo 16y ago

So if I made a system that traded automatically and I was convinced that it would beat the market, how would I go about connecting it to the stock exchange? What costs would there be?

desponsible 16y ago
Something like this - http://www.interactivebrokers.com http://www.interactivebrokers.com

MikeCapone 16y ago

I wonder how well covered their downside is. Will a black swan make it blow up spectacularly, negating any previous gains?

cameldrv 16y ago

These types of systems are now common in the market, and you need more sophisticated algorithms to make any money. They said that they picked 2005 because it had a lack of "unusual market activity." I bet they picked it because their system didn't work in later years, because there's too much competition to make money with their system now.

deleted 16y ago

[deleted]

kurumo 16y ago

I work in this field. That is not the first paper written about this system; the previous was "Sentiment Analysis of Financial News Articles", Schumaker et. al. This is not the only academic project describing something like this, see papers by Mittermayer and Lavrenko for other examples. Short summary of the results is basically this: you would have to be insane to trade purely on output of a system like this. There are multiple issues with this, the primary being that most of these systems do not and cannot distinguish documents leading the trend from those lagging the trend. Furthermore, to actually be able to trade on the indicators derived from news you need to encode the market expectation into your model, which is a separate (and difficult) problem. The margins these systems produce in simulated trading are small, and for some reason nobody takes transaction costs into account. This is not to say that systems like this do not exist in the real world - they certainly do, but the people that build and/or use them generally will not discuss the details, for obvious reasons.

naner 16y ago

Not really surprising. This been done before to some degree by Kurzweil and Schmidhuber and I'm sure others.

desponsible 16y ago
Any pointers?
- naner 16y ago
  Be really smart? No way in hell could I do this. You need a strong math, statistics, and machine learning background to begin with.

jheriko 16y ago

"Computer programs can gamble better than gamblers" Sorry to say, but I'm completely unsurprised by this - statistical analysis is the most sensible approach to the problem. Gamblers tend to be less sensible and calling a gambler a stock market trading pro doesn't stop him being a gambler... I'd also be wary of labeling pros in a system which will naturally produce "lucky" and "unlucky" individuals regardless of skill... at least some proportion of successful traders are just lucky. I can't measure it, but it seems very heavily implied...

Maven911 16y ago

I have a question for all of you...how do so many of you know a lot about financial markets and finance...I made an Ask HN about it: http://news.ycombinator.com/item?id=1422453 http://news.ycombinator.com/item?id=1422453