The Masters of the Market stay
In darkened rooms where 'lectrons play
And talking heads cannot convey
The new idea's birth
For they hunger in their secret dreams
For the trading highs of cruel machines
Projected on a million screens
Without a sense of worth.
At last the HFT algo show!
The crash nobody could foresee!
Your neck inside the rope!
Indices wihout hope!
The looters that ignore the SEC!
Perfumed fingers through the till
The asks all grow but never fill
The red ink has begun to spill
The market starts to tank!
The regulators and the traders too
Are uncertain if the plunge is through
And consult their charts to find a clue
But the frozen screens go blank!
At last the HFT algo show!
High VIX grown of a fractal seed!
A bubbilicious time!
A dark and dirty crime!
The bulging eyes of traders strangled by their greed!
(apologies to Alan Moore)
A paper by W. S. Rea and co-authors reminds me of why the methods of analysis I used in this article failed to provide any useful insight despite appearing to work on longer term charts here, here, here, and here.
The time series outputs of some dynamic systems possess long memory--meaning that the present beharviour is influenced by the entire past history of the system. It may be that recent events have a larger statistical impact on the present, but the characteristic of a long memory requires that even events in the distant past are reflected in the present behaviour.
How memory is "stored" in the system varies. For instance, in the days when HFT was a distant dream, the response of a stock's price to a good quarter would depend at least in part to the company's past behaviour. One which disappointed quarter after quarter would not benefit as much from a good quarter as one which had a history of meeting or exceeding expectations--the market might exhibit some skepticism. Where is this memory stored?
In climate systems, the memory may be "stored" in slow-response variables, which may yet influence the reactions of fast-response variables to various forcings. The geological system is extremely complicated, because local climatic factors, which are driven by such things as ocean currents and the distribution of continental land masses are strongly influenced over the long-term by tectonic activity; and over shorter timescales by the distribution of fresh water bodies, themselves being altered in response to isostatic uplift. Slow variations occasionally lead to catastrophic events, meaning sudden irreversible changes can occur in what had been a slowly evolving system.
Many economic systems appear to have long memory. The activities of today are influenced by events of the past. Nixon striking down the last vestige of the gold standard, Volcker raising interest rates, the "strong dollar" policy of Summers, the wars of Bush the Elder and Bush the Younger, Obama's lates raise of the debt ceiling--all of these have had impacts that have rippled through the USD gold price from then until today.
Dynamic systems analysis--at least the type used on this blog--work best on systems that have this kind of memory. The lessons of the past must echo, at least in some form, through the system for analysis to give us some interpretable results, as they do for unemployment and the gold-silver ratio.
HFT algos are different. They have no memory and only dream of a concept of value. Arguably, they estimate a value on the basis of variability in observed parameters; but their means of acquiring or disposing of a stock subverts the normal method of price discovery. Each trade during a flash crash has no identifiable connection with previous trades, but represents that maximizing of an unpredictable opportunity. When the flash is done, normal trading between human resumes as if nothing had happened.
In darkened rooms where 'lectrons play
And talking heads cannot convey
The new idea's birth
For they hunger in their secret dreams
For the trading highs of cruel machines
Projected on a million screens
Without a sense of worth.
At last the HFT algo show!
The crash nobody could foresee!
Your neck inside the rope!
Indices wihout hope!
The looters that ignore the SEC!
Perfumed fingers through the till
The asks all grow but never fill
The red ink has begun to spill
The market starts to tank!
The regulators and the traders too
Are uncertain if the plunge is through
And consult their charts to find a clue
But the frozen screens go blank!
At last the HFT algo show!
High VIX grown of a fractal seed!
A bubbilicious time!
A dark and dirty crime!
The bulging eyes of traders strangled by their greed!
(apologies to Alan Moore)
A paper by W. S. Rea and co-authors reminds me of why the methods of analysis I used in this article failed to provide any useful insight despite appearing to work on longer term charts here, here, here, and here.
The time series outputs of some dynamic systems possess long memory--meaning that the present beharviour is influenced by the entire past history of the system. It may be that recent events have a larger statistical impact on the present, but the characteristic of a long memory requires that even events in the distant past are reflected in the present behaviour.
How memory is "stored" in the system varies. For instance, in the days when HFT was a distant dream, the response of a stock's price to a good quarter would depend at least in part to the company's past behaviour. One which disappointed quarter after quarter would not benefit as much from a good quarter as one which had a history of meeting or exceeding expectations--the market might exhibit some skepticism. Where is this memory stored?
In climate systems, the memory may be "stored" in slow-response variables, which may yet influence the reactions of fast-response variables to various forcings. The geological system is extremely complicated, because local climatic factors, which are driven by such things as ocean currents and the distribution of continental land masses are strongly influenced over the long-term by tectonic activity; and over shorter timescales by the distribution of fresh water bodies, themselves being altered in response to isostatic uplift. Slow variations occasionally lead to catastrophic events, meaning sudden irreversible changes can occur in what had been a slowly evolving system.
Many economic systems appear to have long memory. The activities of today are influenced by events of the past. Nixon striking down the last vestige of the gold standard, Volcker raising interest rates, the "strong dollar" policy of Summers, the wars of Bush the Elder and Bush the Younger, Obama's lates raise of the debt ceiling--all of these have had impacts that have rippled through the USD gold price from then until today.
Dynamic systems analysis--at least the type used on this blog--work best on systems that have this kind of memory. The lessons of the past must echo, at least in some form, through the system for analysis to give us some interpretable results, as they do for unemployment and the gold-silver ratio.
HFT algos are different. They have no memory and only dream of a concept of value. Arguably, they estimate a value on the basis of variability in observed parameters; but their means of acquiring or disposing of a stock subverts the normal method of price discovery. Each trade during a flash crash has no identifiable connection with previous trades, but represents that maximizing of an unpredictable opportunity. When the flash is done, normal trading between human resumes as if nothing had happened.
No comments:
Post a Comment