Moore’s Law vs. Murphy’s Law

CalibratedConfidence's picture

The following paper by Andrei A. Kirilenko (CFTC) and Andrew W. Lo (MIT Sloan) "reviews key innovations" around trading beginning with the optimization techniques used on portfolios in the 1950's to today's current and starkly different (becausae moral corruption leads to the damage of uninformed orders through the use of unknown and unpublished order-types were to scalp the American investing public) HFT.

At today's rate of change from technological limit (x) to new limit (x1), we have an amazing ability to see technology's alteration take effect on our societies and cultures.  Because of Moore's Law, we are able to see more clearly now than before the intricate effects imposed by technology on Wall Street.  Surely telephones and electronic communication catapulted the Street to new levels, but those advances were not monopolized by the exchanges.  Today, the very orders that make HFT a beneficial trading strategy and one worth the massive CapEx, are controlled by the exchanges.  That's the difference between this form of "technological advancement" and those of the past, the direct ownership of the critical intersection between information processing and order execution.

As for addressing this issue the author's say:

...what has not changed nearly as much over this period is the regulatory framework according to which these technological and financial innovations are supposed to be overseen.

These innovations (or developments) are as follows, I'm paraphrasing here:

  1. As a consequence of economic growth and globalization, financial markets have become more complex as the number of market participants increased, the variety of financial transactions evolved in complexity, and the levels & distribution of risks swelled.
  2. Much of algorithmic trading involves a bunch of new people memorizing and coding a bunch of other people's intelligent discoveries about numerical relationships of which most of modern finance is based upon.
  3. The last innovation is technological, Moore's Law.

The problem with much of modern finance's modeling efforts rests in using "Laws" created by humans for a system created by humans.  These are not laws in the same way gravity is a law.  As economic and financial "Laws" become extinct change, the introduction of new discoveries about numerical relationships alters the previous ecosystem, introducing chaos momemtarily which is a fertile playground for self-recognizing algorithms to go about encouraging their evolution to the next phase of robust coded maturity.

Oddly, the paper notes Renaissance Technologies troubles as noted in the WSJ on August 10, 2007, claiming RT told investors their key fund lost 8.7% in the first week of August and is down 7.4% in 2007.  At the sametime Highbridge Statistical Opportunities Fund was down 18% as of the August 8, 2007 and down 16% in 2007.  Reg-NMS was slated to come into effect in 2007 and on July 9th, 2007 the SEC's REG NMS Pilot became effective in 250 stocks, which is nearly 1 month to the day prior to the WSJ discussing the destruction to Renaissance, one of Scions of Wall Street hedge-funds, and the publically traded Highbridge Statistical.

Now note please, at this point the creation of Reg-NMS and the ability of certain lobbying firms to insert loopholes disguised to aid markets (locked-market rule) caused a dislocation instantly at two of the top Wall Street quant funds.  This is the essence of the special order-type debate and the damage to market integrity caused by the for-profit exchanges catering to high volume HFT's in a form of "Guaranteed Economics" designed specifically to be beneficial only if you use the technology necessary to participate.

As highlighted in The Problem of HFT:

...the structure of the US equities market stacked the odds against the electronic exchanges. Exchanges struggled to create compelling market models that could sustain large scale algorithmic trading businesses in the absence of captive retail order-flow sources.

It is only now, years after the exodus of the retail prey, are the predator exchanges and HFT community offering up transparency but they are doing just enough to appease the naysayers, what is going on behind the curtain this time is anyone's guess (more here).


A final comment on the paper's discussion of the flash crash.  The authors highlight the SEC's 75,000 contract sale which has been attributed to Waddell & Reed as the root cause on May 6, 2010.  Nanex was sent the trades by Waddell & Reed and analyzed.  Nanex states the flash crash began at exactly 14:42:44 and when you look at the charts of Waddell trades, you can see they did not trade at that time interval for the the following 10 seconds, at which point they only execute two trades (red dots are Waddell Trades):



At this point it has become painfully clear that in the midst of the cries about a new level of transparency, there is a dark collusion hiding the reality facing our financial markets and our regulators are hurting us with their reliance upon the industry to guide them.  As Murphy's Law plays out with our regulators, we'll sum up that action in one word: MIDAS.


Moore's Law Vs Murphy's Law: Algo Trading And Its Discontents by calibrateconfidence

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ebworthen's picture

Let's see, put savings in the robot run casino, the expropraition (theft) prone bank account, or keep it in my posession?

Gosh, really need to think about this, for about 0.05 nanoseconds!  Welcome to the machine.

q99x2's picture

Fortunately those days of High Falutin Technology are behind us and today all one needs to do to make money in the stock market is to BTFD.

Setarcos's picture

Short story: everything is now out of control and nobody really knows what is going on.

Probably no one ever actually did, from Adam Smith, through Karl Marx, through Keynes, on to the Austrian School and the Chicago School ... all competing with each other, like Medieval Scholastics arguing about how many angels could fit on a pin head.

How many trillions of derivatives can you impose on the 'mere' billions of global GDP, especially when so-called 'assets' like sub-prime mortgages and government bonds are really liabilities on the books of banks, and the whole Ponzi scheme is based in the defunct notion of endless growth on a finite planet.

That premis is the 'sand' on which all economic theories and practices have been based since the 1700s and the whole edifice of Industrial Civilization is tumbling down, from the Anglo-American Empire, to the recent 'miracle' of China.

Nothing works any more and, even if there were infinite resources of oil (or gold for that matter), once an economy becomes 'mature', there is no incentive to even maintain what has been built along the way, because maintenance cannot yield profit.

monad's picture

Moore's Law: measuring the importance of new magic tricks to keep flushing out the suckers, or the effectiveness of State education/socialism to make exponentially more of them. Fuck Moore.

Rogue Trooper's picture

It's been a recuring 'meme' on the Hedge recently but this kind of 'wit' is why I love the comments section more than ever +100


Registered Investment Advisor's picture

You didn't get the memo:

HFT creates liquidity for us peasants.  Without HFT the markets would be.......... illiquid?

foofoojin's picture

With out the HFT the market would only have illiquidity for a very brief amount of time. until a seller and a buyer agreed on a price. and after all, is not that what the point of having an exchange house is? so everyone(in the club) knows what the price of that trade was?

Tinky's picture

"Andrei A. Kirilenko"?

That guy plays for the Timberwolves! Never knew he was smart, too.

Dewey Cheatum Howe's picture

It is no fun betting against yourself after awhile.

Rogue Trooper's picture

Just buy a shortwave radio and I'll make contact if your still around.

Unique Snowflake's picture

That's where the big money is made. I once bet myself a dollar with a million to one odds... and I'm a millionaire.

Easy when you learn at the Ben Bernanke Center For Kids Who Can't Add Up Good And Wanna Do Other Stuff Good Too. 

Frastric's picture

Unique Snowflake; you have not 'won' anything, merely reallocated that million from your equity (gambling) fund to your own private balance sheet whilst withdrawn a net total of $999999 from your equity fund.

HD's picture

"Ben Bernanke Center For Kids Who Can't Add Up Good And Wanna Do Other Stuff Good Too"

  Krugman's alma mater. CNBC has a recruiting program there for talking heads.


Rogue Trooper's picture

Is there a 140 charactor summary or less of the key points from this paper?