The Matrix, but with money: the world of high-speed trading

[jerkface]

Hopefully this goes over well here

I have been reading the headlines on iTulip.com for a few months now. I am actually an IT grunt, but I recently started working at a financial institution and thought I better brush up on my financial parlance. Somehow I came across an iTulip article through Digg or Reddit and I was hooked quite quickly.

When news came out not long ago about Golman Sach's HFT program being stolen I was really fascinated. I attempted to make conversation with the treasury/finance guys at work but they just stared back in wide eyed disbelief like I was speaking about a fairy tale creature. There was some news on Bloomberg and other business related publications but I'm not aware of this story gaining traction in the MSN. Go figure right?

Anyway here is this article on Ars Technica, a pretty well respected IT/Gaming/Technology website:
http://arstechnica.com/tech-policy/n...-something.ars

To me this raises one of the fundamental questions of our time. What is money? My 'money' sits on a computer that I walk by at least once a day every monday to friday. Sometimes I have to come in on weekends, because you know, shit happens. Commercial Airplanes are highly engineered systems, flown by a team of professionaly trained individuals that must adhere to federal regulations. Sometimes shit happens and it's a real mess to clean up.

What would happen if a piece of the economy dissappeared - if some of the data got corrupt or lost?

Would the world be ok if the NYSE had to be recovered from last nights tape?

[metalman]

Re: The Matrix, but with money: the world of high-speed trading

how old are u?

[jerkface]

Re: The Matrix, but with money: the world of high-speed trading

1 post old.

[ThePythonicCow]

Re: The Matrix, but with money: the world of high-speed trading

To me this raises one of the fundamental questions of our time. What is money? ...

What would happen if a piece of the economy dissappeared - if some of the data got corrupt or lost?

Would the world be ok if the NYSE had to be recovered from last nights tape?

The low level technical details of how currency denominated accounts are tracked on various computers or how stock exchanges now work mostly by computers nowadays don't worry me that much. There is reasonable diversity and variety and duplication and parallel implementation by independent parties that this underlying technical system is now rather robust in my view. Sure, stuff happens, just as planes fall out of the sky, ships sink and cars crash (occassionally even for reasons unrelated to operator error.) But in none of these cases are the problems likely to cause a catastrophic systemic problem.

Catastrophc systemic problems arise from systemic corruption, and are a higher level phenomenon.

That ars technica article is a good description of the underlying technology however, and another interesting take (which I lack expertise to vouch for) on the mechanisms of High Speed Trading. Thanks.

[ThePythonicCow]

Re: The Matrix, but with money: the world of high-speed trading

1 post old.

Nice retort .

[sunskyfan]

Re: The Matrix, but with money: the world of high-speed trading

BINGO! I have been kind of pointing out on this site that what we are seeing is a virtual economy collapse beside a relatively stable real economy. I have been in the software/modeling world for over twenty years and this phenomenon happens to what ever field a computer is used in. Astronomy, engineering, intelligence, climatology, economics, ... on and on. Sharp people playing with models start to convince themselves that their models are a good description of reality. Then they start to think that if something happens that is incongruent with their model there is something wrong with the new data not their model. Still, armed with great looking graphs and power-point presentations they sally forth until they believe their models over what they are experiencing or are actually seeing. Policy is made, countries are invaded, money is made off of schemes that create capital where none legitimately exists and climatology models predict the end of the world.

Ironically, the current crisis may have more to do with how we decided to invade Iraq than parallels with the Great Depression.

In the electronic banking world a lot of illegitimate capital was created in the last 10-20 years. The "bail out" is partly about trying to legitimize enough of that money to keep the Wall Street model alive and partly to keep the illegitimate money out of the real economy (toxic assets) and, like a virus, discredit all capital.

Some think that we will eventually legitimize all the "bad capital" thus implicitly devaluing the "good capital" along the way causing massive inflation. I think, that the "bad capital" cannot be legitimized and is, and will be, destroyed (the virtual economy is collapsing) causing a relative deflation as real currency which has the highest validity maintains the highest relative value in the real economy.

So far, I think that more capital has been destroyed than legitimized and deflation is still the threat. I know I am in the minority here but that is my thinking.

[metalman]

Re: The Matrix, but with money: the world of high-speed trading

BINGO! I have been kind of pointing out on this site that what we are seeing is a virtual economy collapse beside a relatively stable real economy.

save yourself the trouble...

[metalman]

Re: The Matrix, but with money: the world of high-speed trading

1 post old.

just testing... good answer!

[jerkface]

Re: The Matrix, but with money: the world of high-speed trading

armed with great looking graphs and power-point presentations they sally forth until they believe their models over what they are experiencing or are actually seeing. Policy is made, countries are invaded, money is made off of schemes that create capital where none legitimately exists and climatology models predict the end of the world.

The author of the article makes a similar comment later on. Yes the HFT's are operating within the same model that everyone bases their graphs and power points on - however:
Frequency and amplitude matter a great deal, as do feedback networks and synchronization, which can reinforce both and do great damage to systems ranging in complexity from a simple guitar amp to global markets (again, see 1987). Traders and finance types are often very ignorant of these types of analog system effects, so they miss that a forest has just bloomed from nowhere because they insist on seeing an increasingly large collection of simple trees.

And if we apply the peter principle to the people that are making policy decisions regarding this information then it indicates, to me anyway, that we are no where near a return to 'stability'.

[ThePythonicCow]

Re: The Matrix, but with money: the world of high-speed trading

BINGO! I have been kind of pointing out on this site that what we are seeing is a virtual economy collapse beside a relatively stable real economy. I have been in the software/modeling world for over twenty years and this phenomenon happens to what ever field a computer is used in. Astronomy, engineering, intelligence, climatology, economics, ... on and on. Sharp people playing with models start to convince themselves that their models are a good description of reality.

Interesting observation, thanks (or maybe I'm just more easily impressed than metalman .)

[sunskyfan]

Re: The Matrix, but with money: the world of high-speed trading

T Traders and finance types are often very ignorant of these types of analog system effects, so they miss that a forest has just bloomed from nowhere because they insist on seeing an increasingly large collection of simple trees.

Yes, some control theory might help these folks. But, I don't think that they "miss" what just bloomed I think they feel proud of what they created and that is called greed. They just go about explaining away the blooming as some kind of talent they have for producing something.

[flintlock]

Re: The Matrix, but with money: the world of high-speed trading

BINGO! I have been kind of pointing out on this site that what we are seeing is a virtual economy collapse beside a relatively stable real economy. I have been in the software/modeling world for over twenty years and this phenomenon happens to what ever field a computer is used in. Astronomy, engineering, intelligence, climatology, economics, ... on and on. Sharp people playing with models start to convince themselves that their models are a good description of reality. Then they start to think that if something happens that is incongruent with their model there is something wrong with the new data not their model. Still, armed with great looking graphs and power-point presentations they sally forth until they believe their models over what they are experiencing or are actually seeing. Policy is made, countries are invaded, money is made off of schemes that create capital where none legitimately exists and climatology models predict the end of the world.



Ironically, the current crisis may have more to do with how we decided to invade Iraq than parallels with the Great Depression.

In the electronic banking world a lot of illegitimate capital was created in the last 10-20 years. The "bail out" is partly about trying to legitimize enough of that money to keep the Wall Street model alive and partly to keep the illegitimate money out of the real economy (toxic assets) and, like a virus, discredit all capital.

Some think that we will eventually legitimize all the "bad capital" thus implicitly devaluing the "good capital" along the way causing massive inflation. I think, that the "bad capital" cannot be legitimized and is, and will be, destroyed (the virtual economy is collapsing) causing a relative deflation as real currency which has the highest validity maintains the highest relative value in the real economy.

So far, I think that more capital has been destroyed than legitimized and deflation is still the threat. I know I am in the minority here but that is my thinking.

Damn man, you just put into words what I've been trying to get my head around for years. Great job.

The only thing I disagree with you on is that I think the destruction of "good capital" as you call it , through elimination of manufacturing and other "real" industry is winning out . Remove the "bad capital" and what do we really have left here?

[sunskyfan]

Re: The Matrix, but with money: the world of high-speed trading

Yes. I get the FIRE economy. Thank you very much. I like the basic break-down of this site and there is reason I am not posting over on the Goldismylover.com sites. There is a difference between observing a phenomenon or new process and understanding the driving force behind it. There is also a difference between "Asset Inflation" and "Asset Creation". Also, once you throw in Apple, Microsoft, Intel, Communications (cell phone), and much of the dotcom leftovers into the "FIRE" or virtual economy this is not just about Finance, Insurance, and Real-estate. The “virtual” economy extends much farther.

The crisis is that if you have "asset destruction" all the capital artificially formed from the "value" of the asset in the economy instantaneously looses legitimacy and cascades vaporizing all or part of everything it was mapped to including who owns the house the mortgage was originally created for. If the asset had been real but just overvalued you would adjust multipliers accordingly (inflation as predicted by iTulip) and all would be well if not incredibly screwed up for a while. But anything times zero is still zero and when you zero out part of your economy overnight you see it as deflation and the central banks cannot produce enough money to counter the money destruction going on in the economy.

While commodities are real and can't be vaporized they usually can only be held by proxy and the proxy mechanisms will be affected as well. And, where I would enjoy holding some gold for protection, there just isn't enough gold to enable a functioning economy and some new draconian protocol to isolate the money destruction will be created before gold hits $2k. It is a good hedge but it CANNOT BUFFER any true wealth into the future. The Gold bugs will be trapped like a monkey trying to pull a peanut out of jar that their fist is too big to pull through the hole and hold the peanut at the same time. Ironically, though just printed on paper but clearly not touched by the virtual economy collapse, hard currency will probably become in short supply as it will hold the greatest legitimacy as the source of liquidity in an otherwise frozen economy.

Now, I hope that things aren’t still zeroing because it will be a hell of a mess if one third of the global economy has suddenly disappeared and we can’t find it. But man, how many trillions of dollars do you have to create and still not see a bump in global inflation before we have to think maybe things are not what we thought including the tulipers?

[jtabeb]

Re: The Matrix, but with money: the world of high-speed trading

Hopefully this goes over well here

I have been reading the headlines on iTulip.com for a few months now. I am actually an IT grunt, but I recently started working at a financial institution and thought I better brush up on my financial parlance. Somehow I came across an iTulip article through Digg or Reddit and I was hooked quite quickly.

When news came out not long ago about Golman Sach's HFT program being stolen I was really fascinated. I attempted to make conversation with the treasury/finance guys at work but they just stared back in wide eyed disbelief like I was speaking about a fairy tale creature. There was some news on Bloomberg and other business related publications but I'm not aware of this story gaining traction in the MSN. Go figure right?

Anyway here is this article on Ars Technica, a pretty well respected IT/Gaming/Technology website:
http://arstechnica.com/tech-policy/n...-something.ars

To me this raises one of the fundamental questions of our time. What is money? My 'money' sits on a computer that I walk by at least once a day every monday to friday. Sometimes I have to come in on weekends, because you know, shit happens. Commercial Airplanes are highly engineered systems, flown by a team of professionaly trained individuals that must adhere to federal regulations. Sometimes shit happens and it's a real mess to clean up.

What would happen if a piece of the economy dissappeared - if some of the data got corrupt or lost?

Would the world be ok if the NYSE had to be recovered from last nights tape?

The first rule of Fight Club is that you do not talk about fight club.

The second rule of Fight Club is THAT YOU DO NOT TALK ABOUT FIGHT CLUB!

[Marek]

Re: The Matrix, but with money: the world of high-speed trading

BINGO! I have been kind of pointing out on this site that what we are seeing is a virtual economy collapse beside a relatively stable real economy. I have been in the software/modeling world for over twenty years and this phenomenon happens to what ever field a computer is used in. Astronomy, engineering, intelligence, climatology, economics, ... on and on. Sharp people playing with models start to convince themselves that their models are a good description of reality. Then they start to think that if something happens that is incongruent with their model there is something wrong with the new data not their model. Still, armed with great looking graphs and power-point presentations they sally forth until they believe their models over what they are experiencing or are actually seeing. Policy is made, countries are invaded, money is made off of schemes that create capital where none legitimately exists and climatology models predict the end of the world.

Right on! And particularly well-stated. We are in a sophmoric age in that we are smart enough to use modeling but not smart enough (or perhaps the failure is hubris) to appreciate it is limited by our understanding of/respect for the variables in play. In my many years in analytical software I've learned to always quantify the reliability of each input variable and understand how the less reliable variables can skew results. And in the end you have to be able to stand up and say, "The model says X, but ....".

The formalized process for this is called "Design of Experiment" as applied to the larger field of "System Dynamics". Sadly, I can confirm than these tools were not used before entering Iraq and are not applied at a macro level to the operations on Wall Street. And so, contrary to the current media meme, our economy is not being led by the "smartest guys in the room".