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Guest Post: Algorithms Should Be Monitored On A Daily Basis
Submitted by Frode Haukenes of Econotwist
Algorithms Should Be Monitored On A Daily Basis
Leading derivative expert, author and regular contributor at the Econotwist’s, Espen Gaarder Haug, says algorithms have many weaknesses and should be monitored on a daily basis by people with extensive market
knowledge and experience. The former Norwegian Wall Street trader have
a thing or two to say in relation to the ongoing circus at Oslo
District Court – also known as the “robot case.”
“Should the major players be allowed to carry on trading
algorithm with no monitoring, without people with broad market
experience monitoring them?”
Espen Gaarder Haug
The day traders in the so-called “robot case” – now appearing before the Oslo District Court accused of market manipulation
– run their scheme undisturbed for nearly six months. First, when the
Oslo Stock Exchange contacted the brokerage and investment firm that
owned the shares that the robot was trading, the alarm was raised and
the possibility to manipulate the trading program was removed.
“A rational investor would have plugged these holes quickly,” Dr. Espen Gaarder Haug comments.
“If you choose to outsource market making to a computer and you lose money.. I mean, you just have to accept it,” he adds.
Espen Gaarder Haug holds a Ph.D. from NTNU and is regarded as one of the worlds leading experts on derivatives and option pricing models.
His book “The Complete Guide To Option Pricing Formulas” is seen as “The Bible” by many fund managers and derivative traders.
He has worked almost 17 years as a trader on Wall Street, among others, at JP Morgan and Chase Manhattan Bank.
He has also worked as an active manager of multi-billion dollar hedge funds, like Amaranth and Paloma.
Dr. Haug underlines that he don’t know anything about robot
manipulation other than what’s been written in media, but says he
recognize similar issues from his experience in the international financial industry.
He believes that the trading algorithm requires good internal monitoring y individuals with broad market experience.
“I know many who run algorithm trading, and they’re always
following the trades with several well-qualified employees – and often
by the one who created the algorithm,” he says.
There’s Always A Risk
“Robot trading always involves a risk of weakness in the algorithm,” Haug points out.
“It
is therefore important to monitor whether such risks pops up, so that
these algorithms can be adjusted, or turn off. If you choose to let the
robot run without supervision, you take an unnecessary, additional
risk,” says Haug.
The ongoing court case in Oslo have revealed that the two charged day
traders was able to exploit the same weakness over and over again.
Timber Hill (who is a part of the Interactive Broker Group) was not
aware of this before the Oslo Stock Exchange contacted them on March
14th this year.
Testifying before the court on Tuesday, Thomas Borchgrevink, manager of market surveillance at the Oslo Stock Exchange, said: “I felt that they were not aware of this. They were not on the ball.”
Timber Hill closed down, temporarily, the robot in question when the
Oslo Stock Exchange made them aware of the error, and has since
modified the algorithms.
Chill, Timber Hill
Espen Gaarder Haug assumes that the Timber Hills algorithm was not
only used to make trading in stock (so-called market making) in the
Hafslund (B shares), Wilh. Wilhelmsen and Odfjell (B shares), which is
relevant for this trial.
“In
a way, Timber Hill, should be glad that someone intervened in these low
liquidity stocks, and that no other big caps suffered even greater
losses,” Haug points out.
There may be several reasons why a brokerage firm choose to let a robot trade without supervision, he says.
“They can, for example, have too much faith in their algorithm,
so they do not fear failure. It may also be that they trade many shares
in as many markets as possible, so that each share has little
importance. And they choose to take a risk that in some cases leads to
losses”.
“Around-the-clock monitoring is costly, but the algorithms have
many weaknesses and should be monitored on a daily basis by people with
extensive market knowledge and experience,” he notes.
Mandatory Monitoring?
Haug believes it is reason to ask whether monitoring should be mandatory:
“Should the major players be allowed to carry on trading
algorithm with no monitoring, without people with broad market
experience monitoring them?” Dr. Haug asks.
He believes naive algorithm trading, could not only harm
itself, but at worst, damage the entire economy by reinforce large price
movements.
Espen Gaarder Haug predicted in detail the financial crisis by the
end of 2006, beginning of 2007, in a series of interviews and articles
published by the Norwegian-The-Economist-peer – Økonomisk Rapport in 2007 and 2008.
*
“Although it is difficult to prove, there are good indications that the US stock market crash
in 1987 was reinforced by the naive algorithm trading. The algorithms
were based on a number of imaginative assumptions that broke completely
with the crash. Some major players followed their naive algorithms
slavic and sold more and more the more as the market dropped based on
signals from the algorithms they slavishly followed,” Dr. Haug says.
*
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this was hilarious. "hedge fund creates algorithm which on balance creates losses, customer's capital added to all counterparties, thus flooding the system with needed capital"
someone should give these hacks a medal.
Do the proposed Human monitors have Bionic/positronic brains? A market crash can happen is less than a second, much too fast for any normal human -- no matter how much market experience they might have -- to catch! Good luck wit dat!
What is this shit Tyler? How much did EGH paid to get promoted here? Common this isn't anything like the stuff we come here to read about. It adds nothing to what we already knew (we even knew that EGH is a pompous scandi idiot).
What the fuck am I reading
The market futures Algo's are showing all "Green" for tomorrow's open.
3 months ago futures would have been down - 200 on the way the market traded today.
Gooooooooo! Algo's !
Bitchez
"blah blah PhD blah"
- random Eurofag with book to sell
The 1980s were dominated by a new breed of capitalist and complex financial deals. I was there with American Cyanamid in the Fuckin Middle of it.
It imploded later and we had to salvage parts of it from the ashes to what we called 4 legs of the chair for many reasons. Reasons are in the CFR also. Merger waves and bull markets tend to go together you think. Junk Bonds also crashed since hubris was the day. The leveling process continues kids.
If he asserts "1987 was reinforced by the naive algorithm trading" I would humbly suggest he is naive.
THE MERGER WARS
Truth may be stanger than fiction so you never know...
Next, you're gonna call Oliver Stone a conspiracy theorist...
http://firedoglake.com/2010/08/15/professional-traders-exited-market-before-flash-crash/
Drilldown
because the New York Stock Exchange computerized quote system was delayed, and High Frequency Trading programs took advantage of the situation. The Nanex report also discusses “quote-stuffing”, the practice of dumping seconds long bursts of thousands of quotes in specific patterns of bid and ask prices into a stock exchange.
The only robot is the one in this photo;
http://econotwist.files.wordpress.com/2010/09/espen1.jpg?w=510&h=338
Robots, HFTraders, Algorithms, all boogie men made up to achieve a certain ~agenda>. The War on Liquidity continues. Shame on you and your nefarious agenda.
I aint buy'n nuttin. algo hft bubble making machine bs
Chart: ES and ZB
Sometimes a simple ruler will do.
http://99ercharts.blogspot.com/2010/09/es-and-zb_1216.html
"we even knew that EGH is a pompous scandi idiot"
Hahaha :-) You guys show no mercy.... However, I can't agree with the description above. Espen Haug in no idiot. He makes his money by selling books at the moment - that doesn't make him less competent. On contrary, he's able to speak his mind without any other (and less transparent) agenda.
What Mr. Haug - in fact - is know for, is to be provocative.
As clearly illustrated by this tread...
My quote service only delivers month end data. I'm doing just fine with that and it sure frees up a lot of time to pursue happiness.
-profd
As long as my robot is smarter and faster than your robot, and my algorithm is superior, then I'm all for it. What could go wrong?
They're only robot programs and can't do any harm. Are there really still people out there who are intolerant or something?
Dr. Haug underlines that he don’t know anything about robot manipulation other than what’s been written in media
Algorithms are static, my underlining friend. You can simulate how they will behave, but only with data from the past, or guesses about the future. "Monitoring" them will largely serve only to reinforce your beliefs about them. It won't tell you how they will behave in unpredicted circumstances, or in interactions with other, unknown algorithms.
And finally, algorithms != programs || robots
Bull's eye !
Monitoring Algos is not going to help. You are getting closer and closer to end game, the lemmings have been ignoring the obvious, living in fiction. The fiction is coming down. You can't sustain a financial system based on the requirement for exponential growth.
Algos are not the problem. Algos are the last ditch effort to gain yield.
You can add any layers of monitoring you want, it's still all going to collapse.
I have some advice to add, don't let your lawn mower mow the lawn without human supervision.
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