Robert Harris’ latest book, “The Fear Index,” stars a hedge fund driven by an algorithm run wild. In researching his book he went to observe a hedge fund in London. Basically it was a room full of computers and in the course of 20 minutes he watched one computer made $1.5m by itself. The interview below with Paul Solman of PBS is quite revealing when you consider the lengths that some will go to get a competitive edge on their opponents. In the book they develop an algorithm that can predict the markets by analysing the incidence of fear-related words on the Internet, trends on Facebook, Twitter, the sense of a mood. Although Harris thought that this was original he subsequently found out it has been going on for sometime. Bloomberg News feeds are digitalized and go straight into the machine, and buzzwords are picked out, “panic, rumor, fear, slump.” A few milliseconds could be the difference between success and failure in the markets.
The extent that these traders will go to in extreme. In the U.S., high-frequency firms represent only 2 percent of the 20,000 or so trading firms operating today. But they now account for nearly three-quarters of all trades. And the average time a stock investment is held these days is 22 seconds. If time is money, microseconds are now millions. In a recent TED talk on cutting-edge technology, tech whiz Kevin Slavin wowed the audience by describing buildings now being hollowed out in Lower Manhattan. Why? So that high-frequency trading firms can move in and get as close as possible to New York’s point of entry for the Internet at a so-called carrier hotel in Tribeca. You can view his complete TED Talk by clicking here. A great quote that he made was as follows:
Just to give you a sense of what microseconds are, it takes you 500,000 microseconds just to click a mouse. But if you’re a Wall Street algorithm and you’re five microseconds behind, you’re a loser.