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Fast-Reading Computers Are About To Drink Your Trading Milkshake
Add speed reading to the set of mad skills that rich robotic algos are now much better at than humans. The latest craze among the computerized trading community is using Johnny 5 to read through thousands of press releases in combination with some fuzzy logic and the 80/20 rule, to trade stocks pronto, even as plan vanilla Homo Sapiens are still stuck on footnote 1. The WSJ reports that: "Researchers have been working on an artificial-intelligence computer program designed to mimic the way an analyst uses financial news. In simulated trading, the program beat the S&P 500, and when combined with quantitative stock-picking techniques, it saw a return on trades of more than 20%." Unlike traditional number crunching methods to front run those armed with less than the latest SPARCs, this latest development will instead try to determine what the subtext of a given PR narrative is and trade it accordingly. It is unclear whether these programs are already in place, and whether they account for the almost universally wrong knee jerk reaction post any earnings and press release by public companies. We can't wait for corporate counterespionage divisions to reverse engineer these algos, and determine just what keywords and phrases set off Buy programs, and flood their press releases which announce 100% misses to expectations, yet result in flash dashes and inexplicably push stock prices up a few million percent. In other news, the market is now no longer about forecasting, predicting, and, generally, investing, but merely about being faster to frontrun/react/buy than your immediate competitor.
More from the WSJ:
To make stock predictions, the program does what is known as “text mining” — scanning large volumes of content and analyzing the words in it. Computer-aided quantitative funds already are plentiful, but they analyze numerical data rather than text. The new program is different because it attempts to simulate what has traditionally been a human activity.
“Our approach is more like the analyst approach, simulated by a program,” said Hsinchun Chen, director of the University of Arizona’s Artificial Intelligence Lab, in an interview with Digits. “You have an analyst reading papers, looking for clues that others have not observed.”
The program, which was first reported by MIT’s Technology Review, scans stock prices and financial news and buys or shorts stocks it believes will move more than 1% in the next 20 minutes. The system sells the stocks after 20 minutes.
“When you do long-term predictions, there are many variables,” Dr. Chen said. “But … you can have an advantage if you look at five minutes, 10 minutes.”
And before one says this is the dumbest thing in the world, here is the retort: the program's creator, fully aware that past performance is a guarantee of future results, note that based on backchecks Johnny 5 would already be richer than Jim Simons:
The system’s creators tested it using data from five weeks in the fall of 2005 — more than 9,000 news articles and 10 million stock quotes. During that test, the system, called AZFinText, had an 8.5% return on trades, beating the S&P 500 index as well as six of the top 10 quantitative funds. When the researchers used quantitative strategies to select a portfolio and then used AZFinText to decide which trades to make, they saw a return of more than 20%.
But that test period was selected for its lack of unusual market conditions, and Dr. Chen said the evidence is still early. He expects the system to be in use in the next two to five years.
Dr. Chen and Robert Schumaker, an AZFinText creator who has since become an assistant professor at Iona College in New York, also have been working on systems that analyze finance writers’ sentiment. The researchers also are expanding beyond Yahoo Finance and traditional news outlets to analyze blogs and investor and employee forums.
We hope these binary librarians learn to avoid the pages of Zero Hedge early on.
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as you wrote - it would be fun if you were a press release writer to write the prose in a way that completely screwed these machines.
i.e. analyst expectation $0.65, company reports $0.42.
Text
"We were very pleased with our results, BEATING previous year and almost breaking record levels of profits. By almost we mean within 40%. All in it it was a GREAT year and we are BULLISH about our prospects despite the little manner of litigation that might mean GREAT RESULTS for our competitors."
LOL. I would love to see this. Out of work Wall Street analysts are a cagey bunch.
Out of work senators and congressmen would be even better!
http://www.zerohedge.com/forum/how-peacefully-overthrow-oligarchic-klept...
I challenge anyone to find a flaw in this plan to 'democratically' overthrow the U.S. government. Seriously it will work!
Na na na na naaa... I'm smarter than you guys! You guys are so stupid! Blah blah blah blah blah blah...
Listen 2,000 hit's already and my boat is still floating... come on... sink me Bitchez!
you know...it's not a bad idea....muhahahhahahaha.
We would need anonymous' help to do it though.
"........try to determine what the subtext of a given PR narrative is and trade it accordingly." ha ha ha ha--you are good, man....
Me too... I haven't laughed so hard since my dad fell off his bike.
So we can help algos pick stocks? Blue horseshoe loves Bre-x minerals.
yeah, where do I submit my narrative? I can nar-rate with the best of 'em
Go long BreX!
Remember, helicopters and Bre-X don't mix...
Just don't forget to write a suicide note on the way down that way it's legit.
let's see what they do with a sub-1110 narrative, assuming the ppt doesnt do something with it first...
Not a surprise, but, "Oh, crap."
We thought it was bad when investment decisions were shifted to mere speculation based on short-term leveraged plays, as opposed to the "olden days" when investment firms actively sought to understand future growth and development plans within the company, deciding whether a company's stock (valued based on expected dividends) was worth the price.
Now, we've gone ALL the way to buying and selling a stock based on a HEADLINE. You know, that cute grammatically incorrect phrase of a few colorfully chosen words constructed entirely for the purpose of grabbing attention, and often is actually opposite to what the article claims to state (in further bad grammar with poor spelling using industry-specific words incorrectly).
Heaven Help Us All.
Wutlol! The Elitez Mazzez of peeps are HARD on for the Mad Skillz uv de Citigroup (NYSE:C). OMGWTFCOPTER! LOL LOL!
Something like that?
We hope these binary librarians learn to avoid the pages of Zero Hedge early on.
Bahahaaha. Great, now I'm going to start running into robots in the coin and gun stores. Ammo is already expensive enough.
If there are any artists out there who draw political/financial cartoons, please draw one of a bunch of paranoid gold bug robots in a coin shop or gun store.
Skynet cannot become self-aware without a bullshit detector
Hopefully the algos place greater weight behind Cramer's picks.
How do we beat them, you ask? ...lead them to this baby and watch them melt.
http://www.elsewhere.org/pomo/
Gad, I swear that some people use 50-cent words to masturbate to.
Old game, new board - Cramer used the CNBS talkin heads to float a rumor on a stk that he had accumulated a position in, usually one that was heavily short by the HFs....o bother...
We can always hope the robots are as freindly as Walle and Eve.
Eve will kill you. On sight.
Wall*E is a likeable guy, and probably good to have over for dinner, but he seems to enjoy leaving muddy tracks on your carpet.
Eve has been deprogrammed by Walle and is now a lover, not a killer, unless you're messing with Walle. What's really scary is that I know this stuff. :>)
Part of our continuous movie and TV predictive programming is to humanize robots in order to make them likable to us cattle. Put a weapon on Johnny 5 or that troop carrier and paint a smile on the bullet proof cladding and we'll move along a little quicker when ordered....er....asked to.
"Oh look, isn't that remotely controlled anatomically correct mass murderer cute as a bug. I'm sure it's harmless."
Boston Dynamics makes some scary robots. Just youtube some of their more recent prototypes. And what is it with the Japanese and robots? They are an interesting bunch on so many levels. What is it about their culture that they prefer the company of robots to the company of other human beings? Insanity...
My money is on V.I.N. CENT from The Black Hole. Sure, he's beat up and old but he can shoot like the dickens. Plus, he's charming and loveable. Awwww, getting cornholed by computers is so much more acceptable when it's cute.
Can we start a donation fund to put out "hypothetical" press releases on companies through sites like PRnewswire? Would seem like money well spent.
So we can now destroy the machines by putting out junk press releases...
I think we need guidance from JohnConner on this one.
Junk press releases? Was the redundancy intentional?
Actually, the same guys that promise to push your website to the top of Google will get into this in a Wall Street second.
That settles it. I'm opening a trading account with Evelyn Wood.
Double post... grrr
And people still try to say buying gold is a bad idea. You'd rather have your 'money' in pieces of paper that Skynet determines the value of?
I"n other news, the market is now no longer about forecasting, predicting, and, generally, investing"
I can't believe that great swaths of our country have all their savings in this fucker.
By the time this is done, the market will be completely dispised. Arguably, that would be the time to buy, except that it will still be run by robots programmed to screw you over. At the bottom of the market, you'll be the only human trade and at any sign of movement the algos will jump all over you like a pack of hyenas. Whatever stock you pick will dive 15% the minute you buy it.
Did they forget how well those AI Automated Underwriting Systems worked?! Can't we just jail these guys for criminal programming?!
Ya know what happens when they get caught don't ya?
http://www.youtube.com/watch?v=cJ-Xbfbd3WA
You're an especially bad girl today Ruth. Bad girl!!
Now go to your room and no Internet for you for 24 hours. :>)
I just couldn't resist, can I now have my spanking?
Didn't LTCM, Long Term Capital Management have a foolproof system too?
Haven't heard much about them anymore since they were bailed out a decade ago.
frontrunnin the frontal lobes...
but the same thing has happened in news.. the AP puts out a story and then 4000 blogs/zines/papers print the same exact story. There is just a handful of any analytic thought anywhere anymore so why trade that way?
but once we are all borg, how do you frontrun the collective?
4chan Anonymous is how we do it. We pick a target and flood the world with a total piece of horseshit. Like nuking a unfortune 500 company.
Of course, GAI is the solution. Always reported that traders are outdated. They are no longer needed. Lets make room for GAI and stuff will improve.
You have no idea what's coming
And how close it really is...
This makes perfect sense. In an age where analyists are typically late to publishing news (i.e. downgrading of Greek after the fact along with countless other examples), this new re-org by the the algos will read the analyist publications and then trade accordingly. This in effect will put the analyists back in front of the curve, making them look like heros when they "accuratly" "predict" the future events.
tip of the cap goldman!
And that explains how the media manipulates the dopey traders.............
I, for one, applaud this. There are lots of things that machines can do better, and this is and will be one of them. Oh, and I thought Katherine Ross was much hotter as a Stepford wife.
Think of all the time we'll save. We can just deposit our chits at the beginning of our lives and then sit back and let the CAGR run. Bring on the love!
And why the market is up seemly based on nothing cause the media is trying to spin...and why it crashes all at once as the lies get exposed.....yes it explains alot.
and oh i can jsut hear the bankers now when we start hearings on who was manuplating the markets and why and they blame it on the algo's...........
Well the time horizon on profitable trading is going to have to get a whole lot shorter once these machines gain sentience and start nuking us.
Can this program read "greenspeak"? Compile all of Alan Greenspan's comments, verbiage and vernacular in front of congress in his 20 year tenure? If it can dissect and disseminate "green speak" you might have something.
"Backtest" that, why dont ya.
hahahahahahahahahahaha! morons
the whole premise upon which it is based is faulty
ufb how stupid some "investment pros" are
I have always believed that a random number generator is the most efficient price discovery mechanism of all.
This fine story is tagged with 'Jim Simons' and 'Market Conditions', but Jim Simons only appears in the quote 'richer than Jim Simons'. I suspect he might take it as a compliment, then go smoke a cig.
Lets hope the machines they will use will be based upon ROBOT MODEL B9 Lost In Space
So I'm putting my money on that dumb robot from the Lost Space T.V.Series as his totally flawed design enables any enemy to unplug his external powerpack which is located beneath his outer arm.......WARNING.......WARNING.......DANGER,DANGER.......I MUST BE STERILIZED!...........DA...NG..RRRRrrrrrr...Oh-Oh Powerpack removed!
http://legendsrevealed.com/entertainment/wp-content/uploads/2009/10/robo...
ZH,
You better update your Robots.txt file to upload an O(n^2) infinite recursive ackerman function virus loop.
And for all you algos out there...
$45 61 74 20 4D 65 21
Wonder if the algos can compute a CAPTCHA question?
I've seen a couple of bots that do a good job of it.
The memory overrun is an interesting idea though...although we would have to figure out what keywords the algo's capture inorder to poison them properly.
Do you ever play chess against the computer?
Probably not. Why? Because its too hard (if you set it at any level over beginner).
When the mainstream gets wind of these algos, they will not play the game; like they no longer play chess against a computer.
A predator needs, prey. And the prey simply won't show up. Although millions will be lost be the naive before they realize it.
Gonna make a great movie, coming to a theater near you...
with regards to "It is unclear whether these programs are already in place"
yes - many people are doing this already. There are vendors that sell news-parsing software off the shelf.
Skynet
They need a news surfing algo to buy C at $3.80 and sell at $4?
this is the inevitable result of information moving at nearly instantaneous speeds, which is why news is always made before and after the market opens. systems which rely on quantifiable measures, cause and effect, and logical sequential processes, are replaced by systems which integrate the current instant flow of information; ie structural systems.
this shouldn't surprise anyone, for years Greenspan spoke in code, and the market interpreted the code. ( i have an idea that politicians may be replaced with software, and that goes all the way to the top). the notion that this somehow disrupts long term investing is beside the point, what is the future but a number of moments, each unique.
In the older systems the process couldn't move outside the rules of nature, like fractals, the price of a stock could rise or fall, only within limits defined by the limits of their underlying patterns, or volatility. now each moment represents a mark to market. flash crashes are the norm. of course the next moment the system restores itself. In the past the market based itself almost wholly on future earnings, deriving their projections based on past results, and some ability to see into the future, on the matter of interest rates and economic policy.
the physical economy continues to move much more slowly. a factory cannot be moved in a nanosecond, jobs sent offshore monday, and back again tuesday. or could they?
the biggest threat to enabling technology is the disparate flow of information, one person using a telephone to call his broker, another using the internet, another using supercomputers connected directly to the exchange.
the technology causes changes to society, and the economy, which in our case means a uniformly priced global workforce, price structure, and currency. then what matters is the speed at which the patterns or codes are recognized, by the market participants, whether the codes all represent an insiders game (Greenspan and Wall Street) and whether there are times when the current code cannot decipher the message that is being put forth.
the point of fractals as self limiting systems is the basis of Prechter's socionomics, the system assumes the human mood is always limited to the same degree that matter, and the structural forms which guide that matter are limited, because the mind functions in the primitive part of the human brain for the most part, and is subject to all sorts of archaic patterns of thought, and emotions. Ideally these computer algorithms will smooth out the rough spots in the collective nervous system.
volatility is really a mental construction, in many ways the autopilot is more nerve wracking that flying the airplane. The flash crash should be reassuring to readers of this website, who are certain the market is being held up artificially, because it confirms the algorithms are trying to mark the market to current economic conditions. We can take some comfort in that.
" i have an idea that politicians may be replaced with software, and that goes all the way to the top)"
I'm trying to visualize creating politicians as software and how such a system would evolve. It seems we would have to modify the ground rules for Conway's Game of Life, which are
1. Any cell with fewer than two TBTF Bankster Funding Sources dies...
etc.
Come to think of it, considering Barney Frank et al, maybe, just maybe...OMG, we really do live in a world of science fiction!
+∞ for the title of this post. Pure comedic relief!
Hi Tyler,
with regard to your question:
I can assure you that they are in place. I know for certain that Blackrock Scientific Equities (BGI until recently) uses algorithms to search through analyst reports, news releases and other things. As you stated in your piece they generally look for keywords to determine wheter a partciluar pice is favourable or not for a company. I read one report where they claim that their algorithms are approximately 80-90% accurate in assessing the 'flavor' of the story. I think SSgA quant team also has resources dedicated to news based investing.
There is also BlueCrest, the giant London based Hedge Fund which uses computer software algorithms to parse through public data. They actually analyze twitter feeds, and pick up trends through social networking sites. check out www.streambase.com which is catering to these types of players.
This gets interesting when you consider that twitter has in the past admitted to altering the ranking of top trending topics (such as removing #JustinBieber). Who kows what else is being manipulated by these more and more powerful influences on social mood. Max Keiser has been reporting about this a littel bit as well.
Wonderful. So now we have the HiFARTS system in place. (HIgh Frequency Algorythmic Reading and Trading)
No wonder Wall Street stinks.
Do the algos detect sarcasm? And are they programmed to interpret the opposite of what Goldman says (publicly)?
Revenge of the black hat. Something can be sayd about spam as an effective form of obfuscation.
Maybe a tweet bot and round robin it back to a fleet of blogs. Manage it with something custom using macros. If we used RSS "it" would know we are coming. Like back in the late 80's using beige boxes for phreaking phones between area codes to tie area codes together with two modem couplers and a Trash80.
Instead, build a small battalion of virtual appliances to act as the "posters" to the blogs and build a tweet following...maybe even feed the beast called dig with some dummy proxies accounts?
There's nothing new here, just computer programs which read text and assign values to certain words or phrases. Statisticians have been doing this kind of work for years, turning opinion into probability. The real motive until this point in time has been to manipulate public opinion, but that clearly doesn't work as well as it used to. The current motive is to stay ahead of the trend, if you're in the Chinese politburo you give the workers a raise before they shut down production. American is actually less Democratic, or responsive to its mass audience than some less teched up countries, where technology is more likely in the hands of the more intelligent members of society. Anyone can afford an iphone in the USA.
As for hedge funds and trading stocks ahead of the news, if that is possible, where's the harm, these are people working for pension funds and investors 401K, the private investor is no longer on the scene. That's the new reality, big brother is gaming you, and you need some guys in armor on horses who how to handle the weaponry of the 21st century.
I was thinking Day of the Condor, but now I'm thinking Seven Samurai
*double post
so it looks quite possible black hat SEOs and hacker types could really get at these fuckers with a bit of practice then doesn't it?
This is just sad. It is not even funny anymore. So now to insure that there is no malfeasance and "book talking" and manipulation, a one time great marketplace for raising capital will require big brother looking over all correspondence, imperfectly at best, and big brother will fail. I feel like I am stuck on the island with all the Lord of The Flies kids.
Thanks for the article Ty.
> "unclear whether these programs are already in place"
LOL what?? Just google: UAL googlebot
Computers should just issue thier own press releases, and in binary, straight to other computers. That way they could just leave the humans out of it.
This story is old news. It has been done for years. The biggest problem for newsfeed readers is cleaning out the 'crap.'
There was a case a couple of years ago where an airline stock, I believe American, got pushed down 50+% intraday based on a "newsstory" saying it might go bankrupt. It was a regional newspaper in Florida which had relisted its archives in a different form and the article itself was years old.
There's a sexist joke in here somewhere but I'm just too much of a god-damned gentleman to make it.
2010 AN HFT TRADING ODYSSEY (Repost):
http://williambanzai7.blogspot.com/2010/05/2010-financial-market-odyssey...
Sorry Tyler, but dig deeper.
Neural networks have been around for a while. (early 90s)
Give the the outcome that you wish it to achieve and they "learn" and continue to do so.
For example, as someone else suggested here they could easily learn to front run a technical pattern.
(I did love the comments on 20 minute time-frame)
I'd love to have posted earlier, but I really think you have not even scratched the surface.
The downside of these computer programms is, that when a lot of people start using them and putting large funds into them as they grow, is that all these computers will quickly make the same buy and sell orders and turn the market into a jojo.
Also, when a stock only has 3 to 4% potential, the computers won't bother buying them, making them to crash.
Another very scary thing is: Computers use logic to work... the stockmarket... and logic... the stockmarket... and logic... I'm stuck here :)
"Beat the S&P..." is this still a sport??