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I've always found the whole prospect of algorithmic trading morally dubious. Is algorithmic trading overall a good thing? Is it something we should be encouragi

by jordigh 12y ago

I've always found the whole prospect of algorithmic trading morally dubious. Is algorithmic trading overall a good thing? Is it something we should be encouraging? Can I do good in the world by working in algorithmic trading? Would people become algorithmic traders out of a belief that they're improving the world, and would gladly do it even if the pay was slightly lower than other software developer jobs? I really don't know. The only reasons I've ever been marginally enticed to do it is that it looks like a fun problem and people make a lot of money off it. But it's hard to beat the job satisfaction at my current workplace. Right now I can release free software, which helps diagnosing and treating neurological diseases.

brational 12y ago
I think there are 2 pieces to discuss. 1) Is alg trading overall a good thing? Possibly. It adds liquidity which helps ensure proper movement of money. Whether that is overall a good thing or not can be debated. 2) Is it a good thing to make a ton of money off of this? This is the question that is maybe a more obvious no. But you can apply the same logic to basically all of financial services. How much is too much?
martijn_himself 12y ago
I don't think algorithmic trading itself is morally dubious. However the institutions, people's behaviour, artificial barriers to entry in the market and a lot of tangentially related matters are. Your job sounds really interesting though! Are you at liberty to give a bit more details?
- jordigh 12y ago
  > Your job sounds really interesting though! Are you at liberty to give a bit more details? I don't like to broadcast too publicly the details of where I work. Email me at jordigh@octave.org if you want more personal details.
learnstats2 12y ago
If trading is providing a valuable service for society - the finance industry normally claims that it is ("liquidity in the markets" etc) - then it's morally correct to get algorithms to do this efficiently and effectively. This assumes that algorithms are able to deal with edge cases well enough, which I doubt strongly (e.g. Black-Scholes is a massive oversimplification and traders don't even understand that fully) and I don't personally agree with the premise that this is valuable for anyone outside the industry - in particular the distribution of wealth causes severe and increasing problems in society. Martijn also makes good points, although I don't think these are specific to trading. Your job sounds cool! Nice one and thanks for doing it :)
- darkmighty 12y ago
  It's more than liquidity, it's a combination of liquidity and valuation. The best analogy I can could up with is the following: Blaming the finance industry for it's services is like blaming the shipping industry. The shipping industry doesn't produce anything, it merely generates value off your goods. If it didn't exist however, you'd have to haul goods yourself, at lower efficiency, and without immediate availability. It's not absurd to expect this industry to profit for that. Of course, if there is not enough competition, or if there is collusion between shipping companies, you're going to pay an "unfair" price (for most definition of fairness). The financial market has enough competition that most modes of unfairness are almost fully compensated for, and whether it is fair will really depend on your definition of fairness; but it's safe to say it's almost fair for most definitions, I believe. If you're trading a major stock like Apple you can be sure you'll trade for a value near the market's best estimate of what the true long-term value of that stock. Now think of a farmer selling grains. He, an ordinary farmer, has access to the global consensus of the value of it's product at any time: he can be sure he won't be ripped off and can sell for no more or no less than the value of his goods; he can choose to sell at any time, he'll be able to do so instantly. That's a really valuable service.
  - shalbert 12y ago
    The financial industry is necessary for the progression of any industry these days, but you must acknowledge the fact that most leaders of the financial industry don't care about externalities. They are only interested in making money both for themselves and their companies'.
jim_greco 12y ago
I could defend the merits of algorithmic trading - having computers instead of humans price liquid securities has reduced spreads and the competition has brought down transaction costs overall. This all results in less and less of a chunk that "Wall Street" is taking out of "Main Street". And it results in a higher liquidity premium leading to higher share prices overall. This is good for companies and good for shareholders which include everyone with a mutual fund or pension. But at the end of the day it doesn't really matter. People have traded for profit motives alone for hundreds of years without a social motive. Most of finance is conducted for profit alone. There are tons of businesses out there that are for profit alone. There's no need to look down on people for it.
easytiger 12y ago
It's no more or less morally dubious than targeted advertising.
aurelius 12y ago
Algorithmic trading is intrinsically neither good nor bad. It's kind of just a natural progression in the markets once easily programmable computers and high-speed networks came along. How algorithmic trading is used, however, is another story. Humans are still the ones who bring the intent to technology, using it for good or evil. But it may interest you to know that a lot of malicious trading in the markets is not done by algorithmic traders, but by teams of manual traders working in concert to place manipulative trades that cause the market making algorithms to move the market in certain ways. (Source: I work at an exchange, and this is what our regulatory and compliance dept. says all the time.)
- jsprogrammer 12y ago
  Why are the market making algorithms so easily exploited?
  - throwaway283719 12y ago
    Most market making algorithms work like - Market state -> price forecast Price forecast + other factors (risk, liquidity) -> trading decision If you know (or have a good guess) how the algorithm works, you can work out what state of the market would lead to a price forecast in your favour, i.e. would lead to the algorithm offering liquidity at a price favourable to you. You then manipulate the state of the market to look like that (generally this is "spoofing" or "layering"), wait for the algorithm to respond, and then take advantage of the favourable liquidity it offers. When people calibrate their algorithms, they use real market data. Most of the time, someone isn't actively manipulating the market, so the model is not calibrated to handle those situations.
    - aurelius 12y ago
      I know someone who used to work at an algorithm trading firm and did electronic market making. He said they used to go to great lengths to program their algorithms to try to spot this sort of manipulation, but it's a hard problem because you're fighting against a cloud of bad traders who are coordinating their efforts across multiple market centers. I have to say, the regulatory dept. at the exchange I work for does an excellent job of monitoring for any funny business. They have some nifty real-time tools that are scriptable and can replay the state of the market at any point. It's really cool stuff!
AngrySkillzz 12y ago
Algorithmic trading aids in price discovery which means better prices for buyers and sellers overall. Algorithmic techniques like statistical arbitrage help to even out cyclical or correlated market trends by exploiting them, and that means regular investors are more likely to get a better price at any given point in time.
- jsprogrammer 12y ago
  Are there any empirical studies to back up this claim?
n-exploit 12y ago
Excuse my possible ignorance, but I would assume that multifaceted algorithmic trading would work to flesh out corporate transparency, would it not? Given the assumption that nearly every aspect of a company could be used as some type of weight, I would think that a "lesser company" could be deeply impacted if it had even a single data point that could be questioned. I'm hoping that this segment of trading will work to push us in more of the (relatively) transparent corporate model that's practiced by the technology leaders like AAPL, GOOG, etc.
samolang 12y ago
From Wikipedia: "The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s, to meet the needs of samurai who—being paid in rice, and after a series of bad harvests—needed a stable conversion to coin." Substitute gold, oil, stock, whatever for rice and the concept still applies.These are all things that need to be converted to coin in order for them to be of any use. Without traders, this would be extremely difficult, costly, and generally inefficient. With algorithmic traders it becomes even easier, cheaper, and generally more efficient.
shalbert 12y ago
Honestly, if you're interested in helping people with algorithmic trading, the startup I'm working on right now would be perfect for you. Although the pay won't be nearly as great as it would be if you were to work in a big firm, the opportunity to use algorithmic trading while not having to submerge your conscious is something I find more important and it's viable.
Thaxll 12y ago
You probably won't do good working for 90% of the companies.
- jordigh 12y ago
  I'm ok with that. I think it's worthwhile to a find job in the remaining 10%. I find it too cynical to do evil just because everyone else is doing evil, although human psychology very much favours the herd mentality (broken window syndrome and so on).
harperlee 12y ago
Although normally algo trading is equated to high-frequency trading, there is - from what I understand - more to the term, including long-term investment. And in general, the objective of a market is to allocate capital in the best possible way. So, for that, I think that eventually an algorithm - or a market of algorithms - can get to be more fair and more efficient than a bunch of meat-based traders and investors. I'm pretty sure that we are not still there, but, assuming a future in which a huge, benevolent, fair capital allocation system exists, having people working on that might get to be morally good.
jcrubino 12y ago
From the time of the telegraph traders and markets have always been trying to get an speed edge. This has never stopped and likely never will. The meaning of HFT changes with the times.

by jordigh 12y ago

brational 12y ago

I think there are 2 pieces to discuss. 1) Is alg trading overall a good thing? Possibly. It adds liquidity which helps ensure proper movement of money. Whether that is overall a good thing or not can be debated. 2) Is it a good thing to make a ton of money off of this? This is the question that is maybe a more obvious no. But you can apply the same logic to basically all of financial services. How much is too much?

martijn_himself 12y ago

I don't think algorithmic trading itself is morally dubious. However the institutions, people's behaviour, artificial barriers to entry in the market and a lot of tangentially related matters are. Your job sounds really interesting though! Are you at liberty to give a bit more details?

jordigh 12y ago
> Your job sounds really interesting though! Are you at liberty to give a bit more details? I don't like to broadcast too publicly the details of where I work. Email me at jordigh@octave.org if you want more personal details.

learnstats2 12y ago

If trading is providing a valuable service for society - the finance industry normally claims that it is ("liquidity in the markets" etc) - then it's morally correct to get algorithms to do this efficiently and effectively. This assumes that algorithms are able to deal with edge cases well enough, which I doubt strongly (e.g. Black-Scholes is a massive oversimplification and traders don't even understand that fully) and I don't personally agree with the premise that this is valuable for anyone outside the industry - in particular the distribution of wealth causes severe and increasing problems in society. Martijn also makes good points, although I don't think these are specific to trading. Your job sounds cool! Nice one and thanks for doing it :)

darkmighty 12y ago
It's more than liquidity, it's a combination of liquidity and valuation. The best analogy I can could up with is the following: Blaming the finance industry for it's services is like blaming the shipping industry. The shipping industry doesn't produce anything, it merely generates value off your goods. If it didn't exist however, you'd have to haul goods yourself, at lower efficiency, and without immediate availability. It's not absurd to expect this industry to profit for that. Of course, if there is not enough competition, or if there is collusion between shipping companies, you're going to pay an "unfair" price (for most definition of fairness). The financial market has enough competition that most modes of unfairness are almost fully compensated for, and whether it is fair will really depend on your definition of fairness; but it's safe to say it's almost fair for most definitions, I believe. If you're trading a major stock like Apple you can be sure you'll trade for a value near the market's best estimate of what the true long-term value of that stock. Now think of a farmer selling grains. He, an ordinary farmer, has access to the global consensus of the value of it's product at any time: he can be sure he won't be ripped off and can sell for no more or no less than the value of his goods; he can choose to sell at any time, he'll be able to do so instantly. That's a really valuable service.
- shalbert 12y ago
  The financial industry is necessary for the progression of any industry these days, but you must acknowledge the fact that most leaders of the financial industry don't care about externalities. They are only interested in making money both for themselves and their companies'.

jim_greco 12y ago

I could defend the merits of algorithmic trading - having computers instead of humans price liquid securities has reduced spreads and the competition has brought down transaction costs overall. This all results in less and less of a chunk that "Wall Street" is taking out of "Main Street". And it results in a higher liquidity premium leading to higher share prices overall. This is good for companies and good for shareholders which include everyone with a mutual fund or pension. But at the end of the day it doesn't really matter. People have traded for profit motives alone for hundreds of years without a social motive. Most of finance is conducted for profit alone. There are tons of businesses out there that are for profit alone. There's no need to look down on people for it.

easytiger 12y ago

It's no more or less morally dubious than targeted advertising.

aurelius 12y ago

Algorithmic trading is intrinsically neither good nor bad. It's kind of just a natural progression in the markets once easily programmable computers and high-speed networks came along. How algorithmic trading is used, however, is another story. Humans are still the ones who bring the intent to technology, using it for good or evil. But it may interest you to know that a lot of malicious trading in the markets is not done by algorithmic traders, but by teams of manual traders working in concert to place manipulative trades that cause the market making algorithms to move the market in certain ways. (Source: I work at an exchange, and this is what our regulatory and compliance dept. says all the time.)

jsprogrammer 12y ago
Why are the market making algorithms so easily exploited?
- throwaway283719 12y ago
  Most market making algorithms work like - Market state -> price forecast Price forecast + other factors (risk, liquidity) -> trading decision If you know (or have a good guess) how the algorithm works, you can work out what state of the market would lead to a price forecast in your favour, i.e. would lead to the algorithm offering liquidity at a price favourable to you. You then manipulate the state of the market to look like that (generally this is "spoofing" or "layering"), wait for the algorithm to respond, and then take advantage of the favourable liquidity it offers. When people calibrate their algorithms, they use real market data. Most of the time, someone isn't actively manipulating the market, so the model is not calibrated to handle those situations.
  - aurelius 12y ago
    I know someone who used to work at an algorithm trading firm and did electronic market making. He said they used to go to great lengths to program their algorithms to try to spot this sort of manipulation, but it's a hard problem because you're fighting against a cloud of bad traders who are coordinating their efforts across multiple market centers. I have to say, the regulatory dept. at the exchange I work for does an excellent job of monitoring for any funny business. They have some nifty real-time tools that are scriptable and can replay the state of the market at any point. It's really cool stuff!

AngrySkillzz 12y ago

Algorithmic trading aids in price discovery which means better prices for buyers and sellers overall. Algorithmic techniques like statistical arbitrage help to even out cyclical or correlated market trends by exploiting them, and that means regular investors are more likely to get a better price at any given point in time.

jsprogrammer 12y ago
Are there any empirical studies to back up this claim?

n-exploit 12y ago

Excuse my possible ignorance, but I would assume that multifaceted algorithmic trading would work to flesh out corporate transparency, would it not? Given the assumption that nearly every aspect of a company could be used as some type of weight, I would think that a "lesser company" could be deeply impacted if it had even a single data point that could be questioned. I'm hoping that this segment of trading will work to push us in more of the (relatively) transparent corporate model that's practiced by the technology leaders like AAPL, GOOG, etc.

samolang 12y ago

From Wikipedia: "The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s, to meet the needs of samurai who—being paid in rice, and after a series of bad harvests—needed a stable conversion to coin." Substitute gold, oil, stock, whatever for rice and the concept still applies.These are all things that need to be converted to coin in order for them to be of any use. Without traders, this would be extremely difficult, costly, and generally inefficient. With algorithmic traders it becomes even easier, cheaper, and generally more efficient.

shalbert 12y ago

Honestly, if you're interested in helping people with algorithmic trading, the startup I'm working on right now would be perfect for you. Although the pay won't be nearly as great as it would be if you were to work in a big firm, the opportunity to use algorithmic trading while not having to submerge your conscious is something I find more important and it's viable.

Thaxll 12y ago

You probably won't do good working for 90% of the companies.

jordigh 12y ago
I'm ok with that. I think it's worthwhile to a find job in the remaining 10%. I find it too cynical to do evil just because everyone else is doing evil, although human psychology very much favours the herd mentality (broken window syndrome and so on).

harperlee 12y ago

Although normally algo trading is equated to high-frequency trading, there is - from what I understand - more to the term, including long-term investment. And in general, the objective of a market is to allocate capital in the best possible way. So, for that, I think that eventually an algorithm - or a market of algorithms - can get to be more fair and more efficient than a bunch of meat-based traders and investors. I'm pretty sure that we are not still there, but, assuming a future in which a huge, benevolent, fair capital allocation system exists, having people working on that might get to be morally good.

jcrubino 12y ago

From the time of the telegraph traders and markets have always been trying to get an speed edge. This has never stopped and likely never will. The meaning of HFT changes with the times.