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The Biggest Losers From Today's FOMC Conference: Robots

Tyler Durden's picture




 

In a market in which carbon-based trading is now a remnant of a bygone era, and in which robots make trading decision based on statistical regression patterns and keyword scans from press releases, the upcoming Fed conference will be particularly painful to trade for one key type of trader: robots. Reuters explains: "Ben Bernanke's first news conference on Wednesday is a plunge into unknown territory for the Federal Reserve chairman and for computerized trading as well. Computer trading programs face two dilemmas. There is no history of how security prices have reacted during a press conference with the U.S. central bank chief, and dialogue from the briefing will be spoken, rather than transmitted as text." So unless Johnny 5 has perfect the art of real time intonation and context analysis, expect volatility to go nuts in the period between 2:15 pm and 3:00 pm, when momentum traders will accentuate any buying or selling wave even if based on a completely flawed premise, at which point we will see violent reverses, rinse, and repeat. "Computer-driven trading programs are designed to recognize text, so the nuances of Bernanke's answers to reporters will be lost, or at least delayed, as humans intervene. That will make this inaugural conference a learning lesson for future Bernanke press briefings. "It would be quite hard to get a huge amount of accuracy from a one-off, unstructured press conference," said Rochester Cahan, a strategist at Deutsche Bank in New York who leads one of the major sell-side quantitative research teams. "To trade that, algorithmically, would be quite hard," said Cahan, referring to the software code that instructs computers what to buy and sell." Then again, it could be far, far, worse. It could be Greenspan: imagine Liftathonic 3000 trying to make sense of the Masetro in real time, when not one human had any idea what he said.

More from Reuters:

High-speed, computer-driven trading dominates Wall Street and has increased in other markets. But it's still geared to pore over text in electronic form -- corporate filings, the release of economic indicators, news stories or market data -- in search of key words or patterns that might trigger trading strategies.

While the algorithms have become more complex and can easily find words or count them, such as the Fed's use of "optimistic" and "upbeat" to describe the economy in its March 15 statement, parsing the shades of Fed speak can be tough.

For example, in March the Fed said data suggested the economic recovery is on a firmer footing. On January 26, it had said the recovery is continuing, although at a rate insufficient to significantly improve labor markets.

Algorithms may have 50, 100 or 200 variables that can instantly analyze how a market has performed in the past under similar conditions. They can decide in a snap what to do when a certain stock is rising, the industry that stock is part of also is rising and the overall market is rising.

As for why volume on US markets is now beyond abysmal, especially when one excludes HFTs and robots:

Computers "will have gone back and looked at a million cases of where that's happened and say what's likely to happen next," said Alfred Berkeley, chairman of Pipeline Financial Group Inc, an agency brokerage for buy-side clients.

The statistics might show that if those three things have occurred, the next trade is likely to be up, perhaps by 82 percent -- a fact a human might recognize, but not as precisely.

"I might have an intuitive sense that the stock will go up, but I don't have the precision of knowing 82 percent of the time, it's going to go up," Berkeley said.

"You can cut this data lots of different ways until you find these powerful correlations," he said. "So you create these databases of circumstances."

Algorithms are now so sophisticated they can interpret news stories in a way that a person would, focusing on positive or negative words to glean sentiment.

So what is the point of capital markets again?

Either way, prepare for many, many headfakes once Benny and the Inkjets starts speaking.

 

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Wed, 04/27/2011 - 11:42 | 1211846 Cassandra Syndrome
Cassandra Syndrome's picture

Skynet Bitchez

Wed, 04/27/2011 - 12:00 | 1211892 swissaustrian
swissaustrian's picture

IBM has developed a program which will - sometime in the future - be able to react to verbal communication:

http://www-03.ibm.com/innovation/us/watson/index.html

Right now "watson" is just playing jeopardy.

But the underlying algos offer great potential for algo trading.

http://www-03.ibm.com/innovation/us/watson/watson-for-a-smarter-planet/industry-perspectives/finance.html

Wed, 04/27/2011 - 12:12 | 1211942 disabledvet
disabledvet's picture

All I can think of with Jeapordy and "Watson" is that Far Side cartoon with "God" as your opponent.  I hear "God won that one too."

Wed, 04/27/2011 - 12:03 | 1211911 SheepDog-One
SheepDog-One's picture

Bideee bideee bideee, Bitchez. Or in robot- 1010011000101101100010100

Wed, 04/27/2011 - 11:47 | 1211855 ItFarmer
ItFarmer's picture

take a look at JAZZ action today, flash crash and bounce

 

be happy trade algos

http://www.youtube.com/watch?v=vvFRGyV-blQ

 

Wed, 04/27/2011 - 12:06 | 1211879 Hephasteus
Hephasteus's picture

Factorial Fucker Upper 5000 pro.

Comes with combination blueray drive, coffee holder and the front case opens for a handy puke bin.

Guaranteed to arrange n distinct objects into a sequence give or take a blip or two.

Wed, 04/27/2011 - 12:21 | 1211950 slewie the pi-rat
slewie the pi-rat's picture

i'm regressing. i think i have two of your blips, over here, heph.  they are both young hotties in wet T shirts.  one sez:  me love you long time, the other sez:  me love you short time.

i'll try to get the former back to you, somehow.  the latter is pretty busy, right now...

Wed, 04/27/2011 - 11:45 | 1211858 LongSoupLine
LongSoupLine's picture

Wall-E...bitchez!

Wed, 04/27/2011 - 11:46 | 1211859 TruthInSunshine
TruthInSunshine's picture

There has been a run on Carbon due to The Bernank's Krugmanite-Weimar Monetary Policy.

Carbon, bitchez.

Wed, 04/27/2011 - 11:48 | 1211860 Hephasteus
Hephasteus's picture

What will johnny 5 do when he facial recongnitions the speech and learns that it's all lies. Will he freak out?

Wed, 04/27/2011 - 11:49 | 1211875 lsbumblebee
lsbumblebee's picture

They need to invent a robot that can interpret lip quivers.

Wed, 04/27/2011 - 12:16 | 1211945 disabledvet
disabledvet's picture

you sound like a professional.

Wed, 04/27/2011 - 11:56 | 1211896 scratch_and_sniff
scratch_and_sniff's picture

Probably the case that most will be turned off!! liquidity may go walkies. Going to try and arb some spreads myself if that’s the case, don’t fancy being caught out on a monkey directional call as I have a habit of trying to average down-most likely an anti climax.(sincerely hope im wrong).

Wed, 04/27/2011 - 11:59 | 1211905 baconator3000
baconator3000's picture

Our trading floor has a mainframe the size of a warehouse. It is never wrong. We staff a dozen white coat scientists to maintain its data. It picks our stocks 100% accurately.Its as noisy as a jet tho !

Wed, 04/27/2011 - 12:00 | 1211912 TruthInSunshine
TruthInSunshine's picture

All you need are some top grade nuclear physicists and you can be the next LTCM.

Wed, 04/27/2011 - 12:01 | 1211916 baconator3000
baconator3000's picture

Well its never let the boys in the pits down thats for sure!

Wed, 04/27/2011 - 12:00 | 1211906 6 String
6 String's picture

I've officially changed my allocation:

Long dollar, t-bills, Amazon, Moody's, the 2000, and Netflix if I have money left over after buying a new unafforable house, a luxury vacation home, a Bentley, and any other useless crap. Begin watching "dancing with whoever" show. Act like a bigshot with new expensive suits. Put in some applications at Goldman and JPM, I hear they are hiring.

 

 

 

 

 

Wed, 04/27/2011 - 12:13 | 1211936 Dr. Impossible
Dr. Impossible's picture

..you forgot leverage credit card for political donation

Wed, 04/27/2011 - 11:59 | 1211909 TruthInSunshine
TruthInSunshine's picture

IBM's Watson prepped The Bernank for today's earth shattering presser.

Wed, 04/27/2011 - 12:02 | 1211910 alien-IQ
alien-IQ's picture

Imagine the glorious clusterfuck that could be potentially unleashed if the typist tasked with transcribing the Bernanke's conundrums in real time into the hive-mind of HAL were to commit a grammatical error?

Wed, 04/27/2011 - 12:07 | 1211917 slewie the pi-rat
slewie the pi-rat's picture

how can my trading plarforms be locked up?

what the hell is going on here?

i'm a luddite and i can't comprehend this shit!  all my tubes test fine!

there's some smoke, here, but i'm sure it's from my bong.  it smells conncec-ti-cal, not elec-tric-cal.  wait!  porn's ok.  b-bye!

Wed, 04/27/2011 - 12:19 | 1211931 Mercury
Mercury's picture

So unless Johnny 5 has perfect the art of real time intonation and context analysis, expect volatility to go nuts in the period between 2:15 pm and 3:00 pm, when momentum traders will accentuate any buying or selling wave even if based on a completely flawed premise, at which point we will see violent reverses, rinse, and repeat.

And unless these things are acting right off of audio speech recognition Bernanke's words also have to pass through the human (Indian?) filter of the transcriber.  I've definitely seen some blunders in that department before.

Wed, 04/27/2011 - 12:21 | 1211971 NotApplicable
NotApplicable's picture

My son used to watch TV with the closed caption on all of the time merely for the entertainment value.

Wed, 04/27/2011 - 14:14 | 1212582 Orly
Orly's picture

CNBC World is quite a hoot, actually.  Let's just say the translator has a decidedly perverted sexual bent.

Wed, 04/27/2011 - 12:09 | 1211933 disabledvet
disabledvet's picture

i'm with one at the bar right now.  he tried every lie in the book.  he drank himself silly AFTERwards.  I listened...nodded.  He "let one rip" and is now stumbling out the door.  Very unbecoming for a robot i thought.  eh, whatdayasay?

Wed, 04/27/2011 - 12:11 | 1211938 Stuck on Zero
Stuck on Zero's picture

No issue.  The robots were pre-programmed to buy, buy, buy when the Fed says anything.  With printed money, of course.

Wed, 04/27/2011 - 12:19 | 1211960 NotApplicable
NotApplicable's picture

Otherwise they'd get stuck on all of the "Ummms" and "Likes."

Wed, 04/27/2011 - 12:19 | 1211959 BKbroiler
BKbroiler's picture

Bernanke and his drone army.  This shit just gets scarier.

Wed, 04/27/2011 - 12:39 | 1211987 cowdiddly
cowdiddly's picture

101000000Y^=a+b(x)10010000111010Contained10010010Ho=110010foreseable future10001001000100b=r(Sx/Sy)10010000no inflation100010001000*.*$buy1001001010APPL101000lipquiver100101*.*$Sell$1001001GOTOLOOP

Wed, 04/27/2011 - 12:26 | 1211993 Forgiven
Forgiven's picture

They have already plugged his speech into the algorithms to determine it's impact on trading.  Come on!  This is a settled issue.  The fun will be his stammering should someone actually ask a problematic question.

Wed, 04/27/2011 - 12:40 | 1212057 Dreadker
Dreadker's picture

I hope that there is a 'problematic' reporter in there who snuck in with ZH's questions.... how long till they'd get tazed lol

Wed, 04/27/2011 - 12:58 | 1212154 oogs66
oogs66's picture

any credibility the hawks had left is gone too...they have lost any and all respect...not a single one voted against?

Wed, 04/27/2011 - 13:04 | 1212177 AldoHux_IV
AldoHux_IV's picture

Algo's built upon a system whereby written text from the MSM is 'analyzed' and interpreted into the buying and selling of these models is further proof that no matter how 'sophisticated' a system may be, it's still designed to be manipulated and give the illusion of randomness.

Further proof that what policymakers meant by 'the worst is behind is' is that they now know how to disseminate information so as to not to upset the applecart i.e. bad and good news is bullish for risk assets and bearish for purchasing power.

The shit sham circus continues.

Wed, 04/27/2011 - 13:12 | 1212225 azengrcat
azengrcat's picture

Watson is experiencing error code 0x0000BTFD1

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