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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 h

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.
  - eru 16y ago
    > 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. Yes, and No. It's backwards. There's no `company' which can care or not care about its stock price. The company, as a legal person, can't really care about anything at all. And after the IPO the shareholders are the new owners of the company, so they do (or should) care about what happens to the company.
- Eliezer 16y ago
  Bull. Life would go on.
  - carbocation 16y ago
    I agree with you. It seems more likely that without these machines, I'd have to wait a small amount of time longer (probably on the order of minutes, though I clearly can't test this empirically) to execute a trade. Also, welcome back.
  - houseabsolute 16y ago
    Life would go on without the stock market. Life will continue to go on with the status quo. Life would go on if the changes you presumably want were to be implemented. It's not a question of whether life will go on. It's a question of whether it would go on better or worse than it does now.
  - hugh3 16y ago
    Of course it would, just slightly worse. I'm not sure this is much of an argument. The question is cost/benefit of prohibiting short-term transactions. So far I'm sure there's a cost, unconvinced there's a benefit, and suspecting that a lot of the opposition to it is based on the natural human urge to be jealous when other people make money by doing no apparent work.
  - Tichy 16y ago
    Yeah, did they even have a stock market in the communist sowjet union? I hear living conditions have been fantastic there.
    - eru 16y ago
      The communists also ate potatoes.. So potatoes must be awful, too.
      - Tichy 16y ago
        Sorry, your logic is flawed.
- jfager 16y ago
  Automated trading is a tax on transactions, not a lubricant. The machines jump in front of trades between willing "real" buyers and sellers and screw both (or one or the other, depending on the transaction). There are entire companies that now exist solely to try to hide the large trades that actual long-term investors (pension funds, etc) need or want to make, so that the computers can't pick up the signal and pounce in between.
  - joshu 16y ago
    You have no idea what you are talking about. That's a small part of automated trading. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. (FWIW, I worked on an automated execution desk.)
    - jfager 16y ago
      You have no idea what you are talking about. FWIW, I work at a risk analytics company. And if you worked on an automated execution desk, please excuse me for suggesting that you may be more inclined to see and emphasize the positives of what you do every day. I fully admit that I'm probably more inclined to see the negatives, but if you're really suggesting they aren't there, you're kidding yourself. That's a small part of automated trading. It's a small part of automated trading, but reading the news to pounce on something and holding it for only 20 minutes clearly falls in that small part. We're obviously not talking about filling stop loss orders and the like. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. That's just wrong. Funds are compelled to make transactions for a wide variety of reasons all the time. They are very interested in what happens to prices when they start to move to fulfill those obligations. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. "Can and do" does not mean "always and only". But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. But the point is that automated trading systems are far more sensitive to that information, and can act on it much more quickly, meaning the methods to minimize the transparency of a large trade have to become more and more sophisticated, meaning more investment in those methods == tax.
- rauljara 16y ago
  Thank you. That was the explanation I was looking for. My next question then, is whether this flexibility to sell instantaneously is worth the risk of near instantaneous drops of 700+ points in the dow, as happened a couple of weeks ago. My gut tells me that letting computers have a free run of it is not good. But I'm definitely open to being convinced otherwise. And I'm definitely open to a better solution than you have to hold on to stocks for a month or more.
  - hugh3 16y ago
    Well, the near-instantaneous drop we saw a few weeks ago is something that has happened exactly once in history. It will probably never happen again, at least not in the same form, since people have probably gone and changed their software to avoid it. And its consequences, in the end, weren't all that bad -- mostly a bunch of institutional investors made some money at the expense of some other institutional investors, but I haven't heard of anybody getting wiped out. So I'm inclined to pick the free-market devil I know over the government-controlled devil I don't.
    - joe_the_user 16y ago
      America's greatest period of growth, the 1950-1973 expansion, took place within a highly regulated financial system. The "devil" of returning to that level of regulation hardly seems unknown.
      - djb_hackernews 16y ago
        correlation causation blah. playing devils advocate, imagine how much more we would have grown had the financial system been unregulated.
        joe_the_user 16y ago
        My point was that a regulated financial system is hardly an unknown, whether "devil" or not. Indeed, high frequency trading seems like far more of an unknown and giving good evidence so far of being a "devil".
- skybrian 16y ago
  Why does any reasonable investor need to sell within minutes? What does this solve that a giant daily auction wouldn't solve? It seems to me the only reason such speed is necessary is to beat everyone else, and that's only necessary because everyone else does it.
  - regularfry 16y ago
    Why would a giant daily auction not also be subject to speed effects? There'd be a measurable advantage to being able to submit your daily order as late as possible, surely?
    - skybrian 16y ago
      Yes, but only when significant news happens at the last minute. (Think about why companies release earnings after the market closes.)
- joe_the_user 16y ago
  I think we saw in a ah ... little ... incident some weeks ago that high frequency traders are rather problematic market makers (700 point drop, some stocks reduced to 0, etc, remember?).
jsn 16y ago
> 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. Um, sure. It would be a bad idea for me if I'm not allowed to sell the stock I want to sell as soon as I want it, and it would be a bad idea for somebody willing to buy from me, if they are not allowed to. Oh, you're asking why it's a bad idea for you? I don't know, maybe it's not. Do you think I should be prohibited from the trades I like because you think it's a bad idea?
yosho 16y ago
a lot of it is to prevent arbitrage opportunities. If the euro and the US currency exchange rate were out of line with Euro to Yen and US to Yen, someone could make money on the arbitrage. The stock market is therefore a perfect balance of supply and demand and any discrepancies are immediately rectified.
jcl 16y ago
I'm no expert, but I think the AI's strategy works because people read news articles about stocks and then buy and sell in large numbers, causing a stock to temporarily be valued higher or lower than it "should" be. By taking out some of the profit of knee-jerk reactions to news, the AI encourages people to be more restrained in their reactions, to consider longer-term effects, which makes for a more stable market.
gxti 16y ago
Another reason that computerized trading (and speculative trading as well) is theoretically good for the market is that it makes prices more informative. If a trader or computer can successfully predict how a price will move based only on past and present information, then there is an inherent market inefficiency -- the market price is supposed to already reflect all of that information, and only moves when new information becomes available. Of course in reality information does not spread that readily and traders are not completely accurate at estimating prices, so correcting those inaccuracies is quite profitable and helps the market. By selling when a stock is overvalued and buying when it is undervalued, regardless of how that determination was made, the price becomes closer to the fundamental value and thus allows long-term investors to buy and sell at a fair price.
- CWuestefeld 16y ago
  I think this is a really important point. Reacting to new information nearly instantaneously improves the efficiency of the market by factoring in all available knowledge in the blink of an eye. This high speed, in conjunction with its distributed "cloud" nature, makes the market the most efficient means of allocating resources conceivable. In regulated industries -- say, healthcare (viz Medicare/Medicaid), media (viz FCC), etc. -- decisions take months or even years, and are based as much on lobbying and pandering as concrete knowledge. The markets, on the other hand, produce an efficient allocation in fleetingly small timeslices, and do so with complete objectivity. At these levels, greed even crowds out corruption. I believe that those who object to the kind of automated trading described in the OP are dreaming that they could be the ones to score a windfall on some specialized knowledge, rather than have to play on the same playing field (scoured of arbitrage opportunities) that everyone else does.
  - Natsu 16y ago
    How can we prove that information actually exists to cause the movements? While you can tap the "wisdom of the crowds" for things like guessing the number of baseballs in a box at a contest, it simply doesn't work if you're asking them a question they don't have any information about. Given that some of the movements in the stock market have a lot in common with a random walk, you have to excuse my skepticism in wondering how much is signal and how much is noise. Please note that I'm not taking the absurd position that there's no information to be found. Certainly, there are real events (e.g. SCOX going into bankruptcy) which drive stocks down. Rather, I'm of the opinion that most of the "information" in market movements is noise, not signal. And given things like that "flash crash" we can see that there are times when the noise can completely swamp the signal to a degree I think everyone should be able to recognize.
alphaBetaGamma 16y ago
I think your understanding of the benefit of the stock market is flawed: the length of holding does not impact the fact that you are providing capital to companies. The only time money goes from investors to companies is at public offerings (initial or otherwise). All other transactions in shares (be it by long term investors or by high frequency hedge funds) do not benefit the companies directly. But they do provide an indirect benefit: without the existence of these investors (i.e. the secondary market) people would be very reluctant to invest in an IPO as they would be no exit strategy. It is important for people buying in an IPO that the stock will be in demand in the future. The holding period of the people who will buy is irrelevant, the size and level of aggregate demand is not. This being said, I am not arguing that have it is a good thing that the majority of volume is high frequency in nature.
URSpider94 16y ago
My understanding of why (the iPhone app store) is supposed to be good for society is that (it provides customers with many useful applications and games). It has the nice side effect of (putting money in the pockets of many small developers). I fail to understand how (1,000 different bodily-function simulation applications) forwards either of these goals. Maybe someone can explain why this is a good thing to me, but this really seems like a perversion of what (the app store) is supposed to be good for. Markets exist because people want to be able to buy and sell things efficiently, in one place, and make money. They are not out to serve a charitable goal. Buy-and-hold investment is not somehow "better" or more moral than fast trading, both are just choices made by individuals, companies, or computer algorithms operating on their behalf. Think of it this way -- there is a buyer or seller on each side of every transaction this algorithm does, who is willingly (even urgently) entering into that transaction.
arthurdent 16y ago
That's not really accurate. The stock market does not generally act as a mechanism to allow investors to funnel capital to companies. The stock market, as most people think about it, is really a secondary market for fractional ownership of companies. The process by which that fractional ownership came to be owned by other people is the process by which companies are funded (companies go public and sell shares to the public. this is the major process by which the stock market helps companies raise capital (in exchange for equity)). So all the trading that happens intraday, or even holding some stock for years and years generally does not actually serve to invest in the company. The question of whether this is a good thing is entirely orthogonal to the point of the article, which seems to be that reading news fast gives you information about markets. While marketmaking is indeed a valuable market service as described by hugh3, the AI in question doesn't fill that role in any meaningful way (the AI stock picker seems to be a market taker -- it actually removes liquidity when it sees opportunities) A defensible argument for algorithms like this is that they help maintain market efficiency/ensuring that risk in the marketplace is accurately priced (if such a thing is possible). The AI basically is incorporating news that the world knows and acting on it. If the AI didn't do it, then the markets would, but slower. The fact that its making money on 20 second timescales just means that its getting news 20 seconds faster than the rest of the market, which isn't particularly shocking because you might imagine that the rest of the world is responding without the benefit of an AI that reads/interprets articles in bulk.
BrentRitterbeck 16y ago
One word: liquidity!

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.
- eru 16y ago
  > 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. Yes, and No. It's backwards. There's no `company' which can care or not care about its stock price. The company, as a legal person, can't really care about anything at all. And after the IPO the shareholders are the new owners of the company, so they do (or should) care about what happens to the company.
Eliezer 16y ago
Bull. Life would go on.
- carbocation 16y ago
  I agree with you. It seems more likely that without these machines, I'd have to wait a small amount of time longer (probably on the order of minutes, though I clearly can't test this empirically) to execute a trade. Also, welcome back.
- houseabsolute 16y ago
  Life would go on without the stock market. Life will continue to go on with the status quo. Life would go on if the changes you presumably want were to be implemented. It's not a question of whether life will go on. It's a question of whether it would go on better or worse than it does now.
- hugh3 16y ago
  Of course it would, just slightly worse. I'm not sure this is much of an argument. The question is cost/benefit of prohibiting short-term transactions. So far I'm sure there's a cost, unconvinced there's a benefit, and suspecting that a lot of the opposition to it is based on the natural human urge to be jealous when other people make money by doing no apparent work.
- Tichy 16y ago
  Yeah, did they even have a stock market in the communist sowjet union? I hear living conditions have been fantastic there.
  - eru 16y ago
    The communists also ate potatoes.. So potatoes must be awful, too.
    - Tichy 16y ago
      Sorry, your logic is flawed.
jfager 16y ago
Automated trading is a tax on transactions, not a lubricant. The machines jump in front of trades between willing "real" buyers and sellers and screw both (or one or the other, depending on the transaction). There are entire companies that now exist solely to try to hide the large trades that actual long-term investors (pension funds, etc) need or want to make, so that the computers can't pick up the signal and pounce in between.
- joshu 16y ago
  You have no idea what you are talking about. That's a small part of automated trading. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. (FWIW, I worked on an automated execution desk.)
  - jfager 16y ago
    You have no idea what you are talking about. FWIW, I work at a risk analytics company. And if you worked on an automated execution desk, please excuse me for suggesting that you may be more inclined to see and emphasize the positives of what you do every day. I fully admit that I'm probably more inclined to see the negatives, but if you're really suggesting they aren't there, you're kidding yourself. That's a small part of automated trading. It's a small part of automated trading, but reading the news to pounce on something and holding it for only 20 minutes clearly falls in that small part. We're obviously not talking about filling stop loss orders and the like. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. That's just wrong. Funds are compelled to make transactions for a wide variety of reasons all the time. They are very interested in what happens to prices when they start to move to fulfill those obligations. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. "Can and do" does not mean "always and only". But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. But the point is that automated trading systems are far more sensitive to that information, and can act on it much more quickly, meaning the methods to minimize the transparency of a large trade have to become more and more sophisticated, meaning more investment in those methods == tax.
rauljara 16y ago
Thank you. That was the explanation I was looking for. My next question then, is whether this flexibility to sell instantaneously is worth the risk of near instantaneous drops of 700+ points in the dow, as happened a couple of weeks ago. My gut tells me that letting computers have a free run of it is not good. But I'm definitely open to being convinced otherwise. And I'm definitely open to a better solution than you have to hold on to stocks for a month or more.
- hugh3 16y ago
  Well, the near-instantaneous drop we saw a few weeks ago is something that has happened exactly once in history. It will probably never happen again, at least not in the same form, since people have probably gone and changed their software to avoid it. And its consequences, in the end, weren't all that bad -- mostly a bunch of institutional investors made some money at the expense of some other institutional investors, but I haven't heard of anybody getting wiped out. So I'm inclined to pick the free-market devil I know over the government-controlled devil I don't.
  - joe_the_user 16y ago
    America's greatest period of growth, the 1950-1973 expansion, took place within a highly regulated financial system. The "devil" of returning to that level of regulation hardly seems unknown.
    - djb_hackernews 16y ago
      correlation causation blah. playing devils advocate, imagine how much more we would have grown had the financial system been unregulated.
      - joe_the_user 16y ago
        My point was that a regulated financial system is hardly an unknown, whether "devil" or not. Indeed, high frequency trading seems like far more of an unknown and giving good evidence so far of being a "devil".
skybrian 16y ago
Why does any reasonable investor need to sell within minutes? What does this solve that a giant daily auction wouldn't solve? It seems to me the only reason such speed is necessary is to beat everyone else, and that's only necessary because everyone else does it.
- regularfry 16y ago
  Why would a giant daily auction not also be subject to speed effects? There'd be a measurable advantage to being able to submit your daily order as late as possible, surely?
  - skybrian 16y ago
    Yes, but only when significant news happens at the last minute. (Think about why companies release earnings after the market closes.)
joe_the_user 16y ago
I think we saw in a ah ... little ... incident some weeks ago that high frequency traders are rather problematic market makers (700 point drop, some stocks reduced to 0, etc, remember?).

jsn 16y ago

> 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. Um, sure. It would be a bad idea for me if I'm not allowed to sell the stock I want to sell as soon as I want it, and it would be a bad idea for somebody willing to buy from me, if they are not allowed to. Oh, you're asking why it's a bad idea for you? I don't know, maybe it's not. Do you think I should be prohibited from the trades I like because you think it's a bad idea?

yosho 16y ago

a lot of it is to prevent arbitrage opportunities. If the euro and the US currency exchange rate were out of line with Euro to Yen and US to Yen, someone could make money on the arbitrage. The stock market is therefore a perfect balance of supply and demand and any discrepancies are immediately rectified.

jcl 16y ago

I'm no expert, but I think the AI's strategy works because people read news articles about stocks and then buy and sell in large numbers, causing a stock to temporarily be valued higher or lower than it "should" be. By taking out some of the profit of knee-jerk reactions to news, the AI encourages people to be more restrained in their reactions, to consider longer-term effects, which makes for a more stable market.

gxti 16y ago

Another reason that computerized trading (and speculative trading as well) is theoretically good for the market is that it makes prices more informative. If a trader or computer can successfully predict how a price will move based only on past and present information, then there is an inherent market inefficiency -- the market price is supposed to already reflect all of that information, and only moves when new information becomes available. Of course in reality information does not spread that readily and traders are not completely accurate at estimating prices, so correcting those inaccuracies is quite profitable and helps the market. By selling when a stock is overvalued and buying when it is undervalued, regardless of how that determination was made, the price becomes closer to the fundamental value and thus allows long-term investors to buy and sell at a fair price.

CWuestefeld 16y ago
I think this is a really important point. Reacting to new information nearly instantaneously improves the efficiency of the market by factoring in all available knowledge in the blink of an eye. This high speed, in conjunction with its distributed "cloud" nature, makes the market the most efficient means of allocating resources conceivable. In regulated industries -- say, healthcare (viz Medicare/Medicaid), media (viz FCC), etc. -- decisions take months or even years, and are based as much on lobbying and pandering as concrete knowledge. The markets, on the other hand, produce an efficient allocation in fleetingly small timeslices, and do so with complete objectivity. At these levels, greed even crowds out corruption. I believe that those who object to the kind of automated trading described in the OP are dreaming that they could be the ones to score a windfall on some specialized knowledge, rather than have to play on the same playing field (scoured of arbitrage opportunities) that everyone else does.
- Natsu 16y ago
  How can we prove that information actually exists to cause the movements? While you can tap the "wisdom of the crowds" for things like guessing the number of baseballs in a box at a contest, it simply doesn't work if you're asking them a question they don't have any information about. Given that some of the movements in the stock market have a lot in common with a random walk, you have to excuse my skepticism in wondering how much is signal and how much is noise. Please note that I'm not taking the absurd position that there's no information to be found. Certainly, there are real events (e.g. SCOX going into bankruptcy) which drive stocks down. Rather, I'm of the opinion that most of the "information" in market movements is noise, not signal. And given things like that "flash crash" we can see that there are times when the noise can completely swamp the signal to a degree I think everyone should be able to recognize.

alphaBetaGamma 16y ago

I think your understanding of the benefit of the stock market is flawed: the length of holding does not impact the fact that you are providing capital to companies. The only time money goes from investors to companies is at public offerings (initial or otherwise). All other transactions in shares (be it by long term investors or by high frequency hedge funds) do not benefit the companies directly. But they do provide an indirect benefit: without the existence of these investors (i.e. the secondary market) people would be very reluctant to invest in an IPO as they would be no exit strategy. It is important for people buying in an IPO that the stock will be in demand in the future. The holding period of the people who will buy is irrelevant, the size and level of aggregate demand is not. This being said, I am not arguing that have it is a good thing that the majority of volume is high frequency in nature.

URSpider94 16y ago

My understanding of why (the iPhone app store) is supposed to be good for society is that (it provides customers with many useful applications and games). It has the nice side effect of (putting money in the pockets of many small developers). I fail to understand how (1,000 different bodily-function simulation applications) forwards either of these goals. Maybe someone can explain why this is a good thing to me, but this really seems like a perversion of what (the app store) is supposed to be good for. Markets exist because people want to be able to buy and sell things efficiently, in one place, and make money. They are not out to serve a charitable goal. Buy-and-hold investment is not somehow "better" or more moral than fast trading, both are just choices made by individuals, companies, or computer algorithms operating on their behalf. Think of it this way -- there is a buyer or seller on each side of every transaction this algorithm does, who is willingly (even urgently) entering into that transaction.

arthurdent 16y ago

That's not really accurate. The stock market does not generally act as a mechanism to allow investors to funnel capital to companies. The stock market, as most people think about it, is really a secondary market for fractional ownership of companies. The process by which that fractional ownership came to be owned by other people is the process by which companies are funded (companies go public and sell shares to the public. this is the major process by which the stock market helps companies raise capital (in exchange for equity)). So all the trading that happens intraday, or even holding some stock for years and years generally does not actually serve to invest in the company. The question of whether this is a good thing is entirely orthogonal to the point of the article, which seems to be that reading news fast gives you information about markets. While marketmaking is indeed a valuable market service as described by hugh3, the AI in question doesn't fill that role in any meaningful way (the AI stock picker seems to be a market taker -- it actually removes liquidity when it sees opportunities) A defensible argument for algorithms like this is that they help maintain market efficiency/ensuring that risk in the marketplace is accurately priced (if such a thing is possible). The AI basically is incorporating news that the world knows and acting on it. If the AI didn't do it, then the markets would, but slower. The fact that its making money on 20 second timescales just means that its getting news 20 seconds faster than the rest of the market, which isn't particularly shocking because you might imagine that the rest of the world is responding without the benefit of an AI that reads/interprets articles in bulk.

BrentRitterbeck 16y ago

One word: liquidity!