Bots in the Stock Market

Codger

Long time listener, first time poster.

Read a very interesting essay on what actually takes place on trading floors these days.

I remember hearing a long time ago Rym talking about how one of the markets dropping spontaneously and then correcting itself.

This could be the reason, bots! Or more precisely algorithms that place buy/sell orders. There are competing "sniffer" algorithms that can track buy/sell algorithms and buy the same stocks slightly faster and sell it back at a profit. Lastly there are "spoofing" algorithms that fool sniffers by placing fake buy orders of stock that it wants to sell, driving up the price and selling at profit.

The spoofing algorithm is illegal, but sniffers aren't. Really makes you wonder if capital markets really work when you have bots trading shares, independent to the outside world and are just trading to make money.

http://www.lrb.co.uk/v33/n10/donald-mackenzie/how-to-make-money-in-microseconds

Rym

I'm actually in the midst of leaving my current employer for another, where I would as a happy side effect be much more free to make my opinions known regarding equities markets.

So, expect some shows on these things in the nearish future. ;^)

Neito

So, expect some shows on these things in the nearish future. ;^)

Matt

Congrats on the new job

Starfox

Really makes you wonder if capital markets really work when you have bots trading shares, independent to the outside world and are just trading to make money.

John Maynard Keynes would like to have a word with you.

Also, we're like 3 steps away from Skynet.

Byron

I'd like to say what I think about Keynesian economics here, but I find myself in a minority based on a discussion that happened in another thread.

Let the bots trade. It really makes no practical difference as far as I can tell. None of it has any substantial connection with the real world anymore, besides who gets rich off the obfuscation of reality and who loses out.

Nine Boomer

Let the bots trade. It really makes no practical difference as far as I can tell.

Inflation?

Byron

Let the bots trade. It really makes no practical difference as far as I can tell.

Inflation?

You might just be on my side in this argument. There are many other ways people (not bots) introduce inflation by doing really, really stupid and arbitrary shit with money; bots just do it faster. When I tried to address this, I got slammed so hard by so many people.

bodtchboy

I wish I knew more about stock trading. Though I wouldn't have large enough funds to make anything off of.

Hitman Hart

I wish I knew more about stock trading. Though I wouldn't have large enough funds to make anything off of.

I'd like to learn about it just to have some understanding of why a stock is X value or why things went up or down and whatnot.

Vhdblood

I wish I knew more about stock trading. Though I wouldn't have large enough funds to make anything off of.

I'd like to learn about it just to have some understanding of why a stock is X value or why things went up or down and whatnot.

Google and Wikipedia can help quite a bit. Maybe Rym and Scott should do a show on How the Stock Market Works.

WindUpBird

I want to build one of these bots.

Hitman Hart

I wish I knew more about stock trading. Though I wouldn't have large enough funds to make anything off of.

I'd like to learn about it just to have some understanding of why a stock is X value or why things went up or down and whatnot.

Google and Wikipedia can help quite a bit. Maybe Rym and Scott should do a show on How the Stock Market Works.

Dare I say we have....a Thursday episode?

Byron

I want to build one of these bots.

My brother once asked if I would make a bot for him. He really likes trading options and whatever new fangled obfuscated thing financial planners come up with to make money off the ignorant trying to get rich quick. His opening line to me was, "You're good at math and numbers and shit, right? You want to make some money with stocks?"

He seemed to think this was a novel idea. I told him I could use DSP and some various stochastic processes to attempt to predict fluctuations based strictly on the numbers, and the more data is better. Then I told him I wouldn't help him. There are already plenty of bots out there he could find it he looked for hard enough. If everyone one the market had such a bot, what would the stock market mean and represent?

Rym

If everyone one the market had such a bot, what would the stock market mean and represent?

I asked Irene Aldridge what amounted to that very question at a cocktail party last year.

bodtchboy

If these bots are illegal as mentioned, wouldn't their success in the stock market flag the authorities to the user? Kind of like what happened on the movie Wall Street(An illegal stock trading practice)?

Jason

I'd like to learn about it just to have some understanding of why a stock is X value or why things went up or down and whatnot.

Don't make it more complicated than it is. Stocks are worth what people are willing to pay for them. Their value is really the offered purchase price of any given amount of stock based on whether a potential stockholder thinks the company is going to do well or do poorly. If the prediction is that the company's profits will increase, then the price goes up. If the prediction is that the company's profits will decrease, the stock prices drop.

The stock market is nothing more than a horse race in which people buy each others' betting tickets. There are just so many horses in the race at any time that it all seems very complicated.

bodtchboy

So how is it that some people are so successful at it? What is it that they know or do that the majority of people in the stock market can't?

Jason

So how is it that some people are so successful at it? What is it that they know or do that the majority of people in the stock market can't?

Well, for starters, there's a lot of tracking industry information. For example, if you know in advance that Verizon plans to roll out The Next Big Phone, chances are you want to get in on their stock before the announcement, so you can sell at a higher price on the strength of the announcement.

Other than that, there's a lot of math behind stock movement, and there's a lot of pseudoscience, too. For the most part, people who do well with stocks are either just batshit lucky or invest in low-yield, low-risk funds. If you don't have significant purchasing power, you're not going to do well in stocks. Ma and Pa Kettle with their 10 shares of IBM are going to get screwed over the lifetime of the stock.

Byron

their success in the stock market

You are making an assumption here. If all bots are successful by virtue of being a bot, and everyone were to run a bot rather than doing it by hand, what would happen? I think the underlying assumption you are making is generally incorrect.

The stock market is nothing more than a horse race in which people buy each others' betting tickets.

And then they buy tickets to see what bidders are winning the horse races. And then they buy tickets to see who wins the bids on which bidders are winning the horse races. Ad infinitum (ad nauseum). Options and futures both start to get confusing. Then there are options of futures, futures of options, options of options, futures of futures. Everything is tradeable. Everything. With infinite recursion.

The only people who are guaranteed to win are the ones who write the rules of the game.

For example, if you know in advance that Verizon plans to roll out The Next Big Phone, chances are you want to get in on their stock before the announcement, so you can sell at a higher price on the strength of the announcement.

Isn't that called insider trading?

Jason

Isn't that called insider trading?

For almost everyone, no. To be insider trading, it has to be done by an insider.

For example, let's say that you're a technician for Intel and you have secret corporate information about the development of a revolutionary new chip. If you use that information to artificially increase the value of your own stock holdings, that's insider trading.

As a counterexample, let's say that you're a trader who follows Intel's purchases. You see they're buying parts that nobody's bought before, and that Intel is being very secretive about operations in and around a certain plant that hasn't been performing well in the past year. Then you hear through the grapevine that Intel is planning on making a major investor announcement next quarter. You start buying up their stock.

Also: A lot of insider trading is actually legal. Only certain deceptive side-stepping of IRS and SEC rules make certain insider trades illegal.

Not nine

If you don't have significant purchasing power, you're not going to do well in stocks.

And that's why we say "Money makes more money".

Byron

Also: A lot of insider trading is actually legal. Only certain deceptive side-stepping of IRS and SEC rules make certain insider trades illegal.

Yeah I never really understood how this worked. All I knew was that Martha Stewart was hit for it. She seemed like such a nice lady... lol

Schnevets

It's also worth noting that there are thousands of people analyzing and assessing any given stock at any time, and they have a lot information/experience/influence than the typical person. So your "gut feeling" about a Verizon announcement is almost definitely not unique, and the most popular and favorable choice is usually reflected on the market. However, there is the rare occasion where the most intelligent option doesn't end up paying out.

Jason

There's also the problem that having those thousands of people all analyzing the same data actually changes the data. The cat is both alive and dead.

The stock market is very much an allegory for quantum mechanics.

Apreche

It's also worth noting that there are thousands of people analyzing and assessing any given stock at any time, and they have a lot information/experience/influence than the typical person. So your "gut feeling" about a Verizon announcement is almost definitely not unique, and the most popular and favorable choice is usually reflected on the market. However, there is the rare occasion where the most intelligent option doesn't end up paying out.

There's also the matter of speed. You may know something, but everyone in the world can read the news too. Even if you have a really smart bot and make great decisions, you will be slower than the other guy. They have datacenters that are directly linked to the markets. They can get the market data and make a ton of trades while your bot is still deciding what to do. By the time your bot decides, its decision is no longer optimal, but you haven't yet gotten the new data, so you don't know that.

Schnevets

It's also worth noting that there are thousands of people analyzing and assessing any given stock at any time, and they have a lot information/experience/influence than the typical person. So your "gut feeling" about a Verizon announcement is almost definitely not unique, and the most popular and favorable choice is usually reflected on the market. However, there is the rare occasion where the most intelligent option doesn't end up paying out.

There's also the matter of speed. You may know something, but everyone in the world can read the news too. Even if you have a really smart bot and make great decisions, you will be slower than the other guy. They have datacenters that are directly linked to the markets. They can get the market data and make a ton of trades while your bot is still deciding what to do. By the time your bot decides, its decision is no longer optimal, but you haven't yet gotten the new data, so you don't know that.

Yeah. I just remembered reading about a line of fiber that has just been installed between New York and Europe specifically for a financial company. Final result: 1 millisecond faster communication.

I see this whole bot thing as another financial arms race. Give it another year (if not sooner) and bots will just become a weapon everyone has, and something that people adapt to. I think the real business now is to program bot spotters: scripts to identify bots, and possibly even exploit them. In fact, human intuition might even become more useful.

Byron

I just read this blog entry that talks about the market in a sort of global context, outside of just "I'm an investor and I want to make more money with the money I have right now." It probably is incorrect by the standards of economists/financiers ("supply and demand rule everything, and they are subjective, so everything is legitimate as long as it is driven by desire"), but I sort of chuckled at some of the points being made as relevant to this thread and another off-topic rant.

[Currency] is becoming a hall of mirrors, money referring to itself in an infinite regress. Little wonder that people are attracted to gold, because gold seems to be a tangible, solid measure of value, something we can rest on in an environment where everything seems relative. Yet this, too, is an illusion. The yellow metal only has value because it has a history of being deemed to have value. It is no more an objective measure of value than the pieces of coloured plastic, notes, that make up legal tender.

To explain what I mean, let’s start with a definition of what money is. It is rules. Rules about value and obligation. ... Now if money is rules, then what does it mean to “de-regulate financial markets” as was claimed in the 1990s? ... Instead of government for the most part making the rules, the traders started making the rules. The logic was, as Alan Greenspan argued, that because everyone was acting in their self interest then nothing could possibly go wrong. Pricing would be accurate, the less formal self organisation of the market would be superior to the formal oversight of governments (what would governments, which are always bad, know?) and everyone would win. Free lunches as far as the eye can see.

You can already see the bias inherent in the quoted text. Feel free to read on or not. I only mention it because there were echoes of both sides of other conversations in it.

Codger

Well I find this economic blog to be very insightful, with well though out opinions on modern economics. It is run by a group of Australian economists sick of the "spin" that mainstream media and political class spew everyday.

I can see that most Americans would see it as bias towards more regulation and less free market capitalism. But look at where the theory of Adam Smith "invisible hand" has lead us? Global Financial Crisis!

Here I'll quote Mr Dave Riley of Fast Karate "Maybe the invisible hand is invisible, is because it doesn't fucking exist!"

Yet this ideology has shaped the economy since the industrial revolution.

Byron

I think this discussion has started to evolved from the concepts of bots in the market place into the market place itself and what it is/means. The market itself is fundamentally defined by currency and the movement thereof.

But look at where the theory of Adam Smith "invisible hand" has lead us? Global Financial Crisis!

With that, I rehash this older thread where everybody hated on my opinions for being outside what is taught as proper and acceptable in finance and modern economics. From that link into the next page is a bit of a discussion on what currency represents, what purpose it serves, and (as I was arguing) what it should represent. It seems like there might be some people on my side of the discussion in this thread here.

Codger

The reason with have bots in the first place, is due to selfish ideology. I mean do you really need to make trillions of dollars in trades each day to gain a mere cents per share.