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> It worries me when even people on HN are talking about banning 'harmful' algorithms. Why? Algorithms can be harmful as much as anything else. > The people

by cbsmith 12y ago

> It worries me when even people on HN are talking about banning 'harmful' algorithms. Why? Algorithms can be harmful as much as anything else. > The people whose algorithms ran up the stock and lost a bunch of money over a joke will learn their lesson, or will go out of business, soon enough. The problem is that won't happen. The advantage of trading stupider, but slightly faster, than the other guy is too huge. Sure, sometimes you lose money, but most of the time you make money. It's classic game theory: the stupider but faster algorithm benefits from the slower but smarter algorithms... unfortunately though, it damages the ecosystem, and if it is allowed to continue it might actually grow to kill the ecosystem. While in theory, it is improving the liquidity of the system, the way the game is rigged, the rewards for the improved liquidity far outweigh the benefits. > The SEC shouldn't get involved. I'd argue quite the contrary. Now, the SEC shouldn't be saying, "you can use this algorithm" and "you can't use that algorithm", but I think there is a case to be made for imposing trading rules that don't reward a 5% speed improvement over 100ns equally to a 5% speed improvement over 100s.

harryh 12y ago
None of what you said makes any sense. I can trivially implement a trading algorithm that is faster than anything else by ignoring the outside world and choosing a price at random. Algorithmic traders don't benefit by simply being faster, they benefit by being faster to the correct price.
- Crito 12y ago
  "Correct price" is not boolean. Speed and accuracy both have degrees and they trade off. High frequency traders use algorithms which are not as accurate as possible, but are fast. They knowingly use algorithms which have compromised accuracy for speed. They therefore deserve zero sympathy when their algorithms fuck up. They knew what they were getting into, so they should accept the consequences with grace.
  - icebraining 12y ago
    But the context wasn't people saying we shouldn't have sympathy, but that they should be illegal.
    - cmdrfred 12y ago
      My two cents are that for something to be illegal there has to be a victim, and the victim can't be yourself. Whomever employed the persons responsible might have a legitimate claim to damages. But as they say in the kitchens I grew up working in, the traders eat their mistake.
    - cbsmith 12y ago
      I didn't realize anyone was suggesting they should be illegal. I was suggesting that the structure of the marketplaces have resulted in a flawed set of incentives that threaten the health of the market. There is a need to change the rules to keep the market healthy.
  - harryh 12y ago
    I certainly agree that when their algorithms fuck up they deserve no sympathy. They lost money, and that's that. But that shouldn't be a reason to consider making operating on those algorithms illegal.
- tree_of_item 12y ago
  Can you see why this is a complete strawman? You just claimed that, because a completely random algorithm would be "fast" but incorrect, then there is no tradeoff between being fast and being correct. What cbsmith makes complete sense: The advantage of trading stupider, but slightly faster, than the other guy is too huge. This does not mean choosing at random, it means we are greatly advantaging simplistic algorithms that are just barely good enough. The fitness landscape for these algorithms hasn't been designed by computer scientists, it just kinda happened through circumstance. As society gets more computerized, this sort of explicit design of computational spaces will become increasingly important.
  - harryh 12y ago
    I think that you and cbsmith significantly underestimate the sophistication of these algorithms. If you are so certain that they are dumb and arriving at incorrect prices (but quickly) it should be easy for you to go trade against them and make a lot of money.
    - seba_dos1 12y ago
      "dumb" and "sophisticated" aren't mutually exclusive, especially when you look at this particular example: only sophisticated algorithms could automatically react to Tesla announcing new product, so only them could do dumb decision and take April Fools joke into account when trading. The point they seem to be making is that benefits of fast trading massively outweigh the losses from making dumb decisions like there, so algorithms that integrate more and more input signals into decision making win in long term - no matter how rough are their assumptions about those signals. It's not about algorithms being fast and simple - it's about algorithms doing more and more complicated stuff (not in "how", but "what" they do), so they can easily make (and will make more often with time) dumb decisions when looking from human point of view - but at the same time they can quickly react on much more types of events that normally would have to be noticed by human first, or already deduced from market actions.
    - brownbat 12y ago
      > If you are so certain that they are dumb and arriving at incorrect prices (but quickly) it should be easy for you to go trade against them and make a lot of money. It is easy to do this, as demonstrated by the article. Just con the algorithms with fake newsfeeds. That's also illegal though, so no one is going to go out and prove it. They shouldn't need to when we can see natural experiments like this.

by cbsmith 12y ago

harryh 12y ago

None of what you said makes any sense. I can trivially implement a trading algorithm that is faster than anything else by ignoring the outside world and choosing a price at random. Algorithmic traders don't benefit by simply being faster, they benefit by being faster to the correct price.

Crito 12y ago
"Correct price" is not boolean. Speed and accuracy both have degrees and they trade off. High frequency traders use algorithms which are not as accurate as possible, but are fast. They knowingly use algorithms which have compromised accuracy for speed. They therefore deserve zero sympathy when their algorithms fuck up. They knew what they were getting into, so they should accept the consequences with grace.
- icebraining 12y ago
  But the context wasn't people saying we shouldn't have sympathy, but that they should be illegal.
  - cmdrfred 12y ago
    My two cents are that for something to be illegal there has to be a victim, and the victim can't be yourself. Whomever employed the persons responsible might have a legitimate claim to damages. But as they say in the kitchens I grew up working in, the traders eat their mistake.
  - cbsmith 12y ago
    I didn't realize anyone was suggesting they should be illegal. I was suggesting that the structure of the marketplaces have resulted in a flawed set of incentives that threaten the health of the market. There is a need to change the rules to keep the market healthy.
- harryh 12y ago
  I certainly agree that when their algorithms fuck up they deserve no sympathy. They lost money, and that's that. But that shouldn't be a reason to consider making operating on those algorithms illegal.
tree_of_item 12y ago
Can you see why this is a complete strawman? You just claimed that, because a completely random algorithm would be "fast" but incorrect, then there is no tradeoff between being fast and being correct. What cbsmith makes complete sense: The advantage of trading stupider, but slightly faster, than the other guy is too huge. This does not mean choosing at random, it means we are greatly advantaging simplistic algorithms that are just barely good enough. The fitness landscape for these algorithms hasn't been designed by computer scientists, it just kinda happened through circumstance. As society gets more computerized, this sort of explicit design of computational spaces will become increasingly important.
- harryh 12y ago
  I think that you and cbsmith significantly underestimate the sophistication of these algorithms. If you are so certain that they are dumb and arriving at incorrect prices (but quickly) it should be easy for you to go trade against them and make a lot of money.
  - seba_dos1 12y ago
    "dumb" and "sophisticated" aren't mutually exclusive, especially when you look at this particular example: only sophisticated algorithms could automatically react to Tesla announcing new product, so only them could do dumb decision and take April Fools joke into account when trading. The point they seem to be making is that benefits of fast trading massively outweigh the losses from making dumb decisions like there, so algorithms that integrate more and more input signals into decision making win in long term - no matter how rough are their assumptions about those signals. It's not about algorithms being fast and simple - it's about algorithms doing more and more complicated stuff (not in "how", but "what" they do), so they can easily make (and will make more often with time) dumb decisions when looking from human point of view - but at the same time they can quickly react on much more types of events that normally would have to be noticed by human first, or already deduced from market actions.
  - brownbat 12y ago
    > If you are so certain that they are dumb and arriving at incorrect prices (but quickly) it should be easy for you to go trade against them and make a lot of money. It is easy to do this, as demonstrated by the article. Just con the algorithms with fake newsfeeds. That's also illegal though, so no one is going to go out and prove it. They shouldn't need to when we can see natural experiments like this.