Wall Street and Main Street – the disconnect.

Excellent video from The Economist regarding the disconnect between Wall Street and Main Street i.e. Stock Market and the Economy. The S&P 500 is up 38% since the middle of March this year when the US economy has been going through one of its worst recessions. The US Federal Reserve had a role here by providing aid packages so the increase in the S&P was seen as a Fed rally and not from normal fundamentals.

How does Wall Street influence the economy?

Below is a great video from “We the Economy”.

On the heels of the financial crisis, Wall Street for some has become synonymous with corruption and greed. Director Joe Berlinger takes us to the epicenter of the financial world – the New York Stock Exchange – to learn how Wall Street really influences the economy and impacts all of our lives.

It is the algorithms that outsmart humans not machines.

Algo TradingWhilst away on hockey tour in Malaysia I was able to avail myself of the ‘The Straits Times’ newspaper which is published in Singapore. One article that particularly caught my attention was that concerning the creativity of algorithms. Most are oblivious to their creativity yet highly sophisticated algorithms have created music based on the works of great artists but in a style that is personalised and therefore indicative of you the individual. They are also replacing writers – Professor Phil Parker of the Insead Business School in Paris has published more than a million reports on Amazon in just a couple of years. Using a proprietary algorithm that produces a report in 10 – 20 minutes instead of about 4 weeks. The algorithm pulls information from the web, performs econometric analyses, creates tables, formats the report and publishes it as a Word document. Professor Parker has also developed algorithms to produce poems, videos and video games.

Algo Trading
Although we could question the efficacy of algorithms on intangible dimensions such as “soul’ and “depth”, one area where they trounce human beings is stock trading. With up to 75% of trades on Wall Street done using computer programmes it is no wonder that algorithms execute trade at lightening speed and carry out numerous transactions every second. On the NYSE the average round-trip transaction time is 600 microseconds. To put into perspective if you blinked it takes you 300 milliseconds to complete the action – during that time NYSE executed 500 trades. This desire to improve efficiency in the market has led to extremely low costs of trading and very high stock liquidity. However it has also produced huge swings in stock prices. On 6th May 2010 – know as the ‘Flash Crash’ – the DJIA fell 9% in minutes but then recovered most of that loss in the subsequent few minutes.

The landscape of society was always made up by this uneasy relationship between nature and man. But now there is this third co-evolutionary force – Algorithms – and we will have to understand them as nature and in a way they are. Kevin Slavin Ted Talk

Kevin Slavin: How algorithms shape our world

Although I have mentioned this TED talk on a previous post – The Fear Index – I thought it deserves a separate post for people to view the presentation.

Kevin Slavin argues that we’re living in a world designed for — and increasingly controlled by — algorithms. In this riveting talk from TEDGlobal, he shows how these complex computer programs determine: espionage tactics, stock prices, movie scripts, and architecture. And he warns that we are writing code we can’t understand, with implications we can’t control.

The Fear Index – if you’re a Wall Street algorithm and you’re five microseconds behind, you’re a loser.

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.