Tuesday, 28 July 2009

Financial markets trading

A detailed article in Ars Technica The Matrix, but with money: the world of high-speed trading explains "high-frequency trading" (HFT) and how most financial trading is high speed supercomputer trading against high speed supercomputer, including software algorithms (algos) & stat arbs, dark pools and hardware:

“…The ECNs [electronic communication networks, which have largely replaced trading floors] offer the advantages of speed, anonymity, error minimization, and audit trails. They've also "ported" many of the problems endemic to electronic networks—security vulnerabilities, the "garbage-in, garbage out" (GIGO) problem, and the problem of technology moving too fast for lawmakers, to name just three—from the Internet to the markets. But the problems with ECNs are a topic for another day. The real issue is that when the average retail investor gets an E*Trade account and tries to play the stock market, she typically has no idea that she's going up against the market equivalent of IBM's chess grandmaster-thumping supercomputer, Deep Blue…

Experts guess that between 60 and 75 percent of the NYSE's daily trading volume is just computers trading against one another using a variety of strategies…

…Rather, they focus on executing as many trades per second as possible and on turning a small profit (often pennies or fractions of a penny) on each trade…”

On the human elements of financial markets trading and the impact of psychology and people on financial markets, these may be of interest:

See also New Scientist article “Falling out of love with market myths” by Terence Kealey, who also highlights the flaws in economics theories on perfect markets, rational expectations and efficient markets – though this is mainly in a different context, that of arguing against government funding of research, which he says is based on a false view that there is a market failure in knowledge and science:

“While bankers were busy promoting models of market success, research-based enterprises were equally hard at work promoting their own false model of "market failure" to justify government subsidies for their endeavours…. [A 2003 OECD study showed] only privately funded R&D led to economic growth, and that publicly funded R&D did not. Worse, the public funding of R&D crowded out private funding, and thus slowed economic growth…. The idea of market failure in knowledge and science is therefore wrong - though it persists universally in research-based enterprises… But because the idea prevails, scientists lose out: as the OECD showed, government funding of research crowds out more money than it supplies, thus driving down research budgets, researchers' salaries and the self-worth of researchers.”

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