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The rise of the financial machines
- ZhuanXia 7y agoIf homo economicus does not exist we must surely be obliged to create him...
- LatteLazy 7y agoI never thought about it before but that's exactly what corporations are meant to be: "personhood"s that think only in economic terms. People get lazy and they run out of greed once they become millionaires and they want abstract things like love or popularity.
- HappySweeney 7y ago> they run out of greed once they become millionaires In my experience, the opposite happens.
- usrusr 7y agoBut they still don't turn into homo economicus. If they lose all care for love and popularity they might just as well find other outlets for irrationality, like bravado, hubris and generally taking things too personal (worst trading strategy ever).
- abdullahkhalids 7y agoI think of it as cancer. Society = body. Humans in society = cells. Some cells are small, some are big. But some cells, for whatever reasons decide to take far more resources than they need to fulfill their function. These are the cancer cells. They have a runaway feedback loop that will never stop on it's own.
- epx 7y agoGreed is good, it's how people eventually lose their money.
- mfoy_ 7y agoIf this even remotely interests you, then I'd highly recommend "Homo Deus: A Brief History of Tomorrow" by Yuval Noah Harari
- zarro 7y ago"Machines are taking control of investing..... Funds run by computers that follow rules set by humans" If the rules/algorithms are set and monitored by humans, the humans are the ones ultimately responsible. Computers are just tools which provide greater utility and control for investors than ever before. That comes with its benefits and also with its potential downsides, but does not lessen from the fact humans are ultimate responsible.
- nosleeptill 7y agoWith more sophisticated machines you just need less people. When the machines start building the systems and then monitoring the systems then the rules will change.
- asdfman123 7y agoHumans may be ultimately responsible, but I think it's pretty clear that the more that decisions are made algorithmically, the less accountability firms running those algorithms take. If there aren't people involved at every step of the way to inject humanity into decision making processes, it's much easier for companies to hide behind their "algorithms."
- robbrit 7y ago> "Machines are taking control of investing..... Funds run by computers that follow rules set by humans" One of the points that the article makes is that this statement is changing, that computers are increasingly creating their own rules. The literal next sentence: "New artificial-intelligence programs are also writing their own investing rules, in ways their human masters only partly understand." You're right though, that the responsibility still falls on the humans. Anybody running algos that they don't understand should ensure that they are covered from a legal/ethical perspective.
- deleted 7y ago[deleted]
- qntty 7y agohttps://outline.com/nGrnKy https://outline.com/nGrnKy
- lawrenceyan 7y agoMachines took over finance a long long time ago. The big firms like Renaissance and D.E. Shaw that ushered us into that age were all largely founded in the 80/90's.
- koheripbal 7y agoyeah, this article lacks any material substance.
- devicetray0 7y agoI'd recommend "Flash Boys: A Wall Street Revolt" for more substance
- mruts 7y agoI don’t. As someone in the industry, almost nothing in that book is actually correct. Moreover, HFT is a very small part of the industry and is not particularly profitable. Quantitative investing as a whole is becoming more and more popular, while HFT isn’t.
- chrisweekly 7y agoAs someone in the industry, you're also unavoidably biased. This isn't snark or accusation, just a factual observation.
- tigerBL00D 7y agoSomeone in the industry might just have a slightly better idea of what's really going on and that's largely what HN is about.
- onaraft 7y agoAnother factual observation is to look at Virtu's recent earnings numbers. They're basically pivoting as hard as they can to get out of speed-based HFT and into execution services, because the profitability of the former is cratering.
- FillardMillmore 7y agoI'm still waiting for an AI that can help me invest in the most lucrative Dutch tulips.
- H8crilA 7y agoThis is known as "tech unicorns" these days.
- mrfredward 7y agoAsk Softbank, as I suspect they have found it.
- mruts 7y agoThis article isn’t very good or informative. Many, maybe even most, of these “black-box” strstegies are derivarive of work done over 40s years ago at Chicago. Certainly there are a few firms doing truly innovative work such as RenTec or 2 Sigma. But a lot are like AQR: just using publically available academic knowledge but doing it better than everyone else. Also I think this article is overstating the prevalence of quant strategies and funds. At my old portfolio analytics firm, we had hundreds of hedge fund clients and not a single one was doing fully automated trades. Of course they had optimization engines and tech to squeeze a few bips here and there, but the fundamental ideas were still generated the old fashion way (through sleep deprived analysts).
- JackFr 7y ago> (through sleep deprived analysts). You misspelled 'material non-public information'.
- deepnotderp 7y agoQuant funds have existed for a very long time. Rentech has been using neural nets, HMMs, speech and language processing in some capacity for decades
- objektif 7y agoHow do you know what they actually use? I thought they are super secretive.
- deleted 7y ago[deleted]
- darawk 7y agoThings leak. And knowing which models someone uses aren't that important. The devil is in the details of all these things. Which datasets, what features to feed in, how to clean them, etc.
- deepnotderp 7y agoIt's actually my understanding that the core of Medallion is the data processing engine. The models themselves aren't that much more advanced than everybody else (iirc). Rather, financial data is extraordinarily noisy and often not i.i.d. and thus things like deep networks, applied alone, will drown in noise. The use of techniques from advanced statistical signal processing, information theory, conpressed sensing, information geometry, etc. allows the data processing engine to automatically and autonomously extract this signal from a sea of noise.
- darawk 7y agoYa, that's likely correct. It's all about how you transform the data you feed into the model, and which data you choose to look at, not to mention how you group companies together. That part is huge too. Once you've done all that correctly, off the shelf ML models will solve your problem just fine.
- yannis7 7y agoAgree with comments. Not only quant funds have been around since forever but in fact the new trend is in a hybrid approach of discretionary/fundamental & algo/quant strategy -- see DE Shaw article on their "quantamental" approach in: https://www.ft.com/content/0364850c-3ebf-11e9-9bee-efab61506f44 https://www.ft.com/content/0364850c-3ebf-11e9-9bee-efab61506...
- pmart123 7y agoThere's a lot of opportunity in human aided systems, i.e. CEO says they are getting a lot of new web traffic after a redesign, but aggregated website analytics show that it isn't the case. Using credit card data in retail, etc. to either trade around a position, or inform a thesis, etc.
- objektif 7y agoAs someone in the industry I would caution everyone techy to take such articles with a grain of salt. Most of these articles are PR pieces by WS to lure tech talent. Yes tech is making a huge impact and it has been for a whole but not replacing everyone.
- neonate 7y agohttp://archive.is/p3RKW http://archive.is/p3RKW
- known 7y ago"Machines are taking control of investing—not just the humdrum buying and selling of securities, but also the commanding heights of monitoring the economy and allocating capital." I think machines investing is less than 1%;
- mruts 7y agoTotal US equity market cap is around 30 trillion. Total money in ETFs is 4.5 trillion. So at the very least machines are investing over 10% of capital. Probably more like 20-30% Of course this only US and only equities, but it's still well above 1%.
- cryptica 7y agoIt's disturbing that machines are the ones making investment decisions concerning human needs. It explains why real innovation has stalled. Algorithms can only make predictions based on existing trends and data, they don't actually have a vision for how to improve human society.
- sgt101 7y agoThe machines are proxies for humans, they are programmed to suit humans and are turned off if they don't do what suits those humans. This is smoke and lies, it's camouflage to prevent people from focusing on the people standing on their necks.
- pascalxus 7y agoreal innovation has stalled because it has been prevented from happening by regulation. Just look at any real industry that involves creating actual things: Automotive or Housing, or Medical insurance. They're all choking from mundane regulations we never hear or talk about.
- opportune 7y agoThese machines are just trading and making value calculations on existing markets, not directly investing in businesses. I would hesitate to use the term “invest” at all, I think the term “allocate” is much more accurate
- ilaksh 7y agoI am hopeful that wide deployment of decentralization technology can help monitor and aggregate real world data relevant to human needs so that these algorithms can be tunes to serve people in general rather than the 1%.
- abbadadda 7y ago> Industries from pizza-delivery to Hollywood are being changed by technology, but finance is unique because it can exert voting power over firms, redistribute wealth and cause mayhem in the economy. This is quite the sensationalist bullshit. What does this even mean? The rest of the article is paywalled, so I don't know for certain where the author is going with this, but what mayhem is there to speak of? As noted by other commentors, retail investors are much better off these days because of tightened bid/ask spreads. After working in HFT for nearly 10 years I've learned the firms that do the best do so by proving value to the market. Through competition with one another, retail investors are much better off by getting better prices from market makers who do a better job.