So it’s great to see someone in the mainstream press (The blog Zero Hedge has been critical in furthering the story) like Goldstein sink his teeth into this story and give it a vigorous shaking.
The Audit
11:58 AM - July 31, 2009
High-Frequency Trading and Crash Risks
Reuters’ Goldstein and an NYT op-ed raise questions about a potential feedback loop
‘See you on the other side’ - Meet Jessica Lum, a terminally ill 25-year-old who chose to spend what little time she had practicing journalism
#Realtalk: This is the best moment to be in journalism - The old stuff isn’t coming back, but that’s okay
Streams of consciousness - Millennials expect a steady diet of quick-hit, social-media-mediated bits and bytes. What does that mean for journalism?
Sticking with the truth - How ‘balanced’ coverage helped sustain the bogus claim that childhood vaccines can cause autism
An ink-stained stretch - Can Aaron Kushner save the Orange County Register—and the newspaper industry?
This is the best moment to be in journalism (25)
The WSJ editorial page hits rock bottom (19)
The New York Times told me to take this down
“If you wouldn’t mind using another publication to advertise your infringement tool, we’d appreciate it”
In AP, Rosen investigations, government makes criminals of reporters
“[A]s flagrant an assault on civil liberties as anything done by George W. Bush’s administration”
Jay Carney press briefing blues
“Reporters are increasingly skeptical about Carney’s demeanor and the veracity of some answers”
Jaron Lanier wants to build a new middle class on micropayments
A future where writers can gain wealth through a “freelance economy”
CJR's Guide to Online News Startups
Uptown Messenger – Hyperlocal news for a neighborhood in New Orleans
Who Owns What
The Business of Digital Journalism
A report from the Columbia University Graduate School of Journalism
Questions and exercises for journalism students.
I've posted some funky stuff on this (even a poem!) but your more serious readers might like to dig into this transcript of an '08 podcast an algo trading, with links to a half dozen more podcasts/transcripts.
http://housingdoom.com/2009/07/22/aleynikov-origins/
#1 Posted by John McLeod, CJR on Fri 31 Jul 2009 at 04:37 PM
FYI good article on Ars Technica about this
The Matrix, but with money: the world of high-speed trading
http://arstechnica.com/tech-policy/news/2009/07/-it-sounds-like-something.ars
#2 Posted by me, CJR on Sat 1 Aug 2009 at 06:53 PM
more follow up
Computer-trading worries grow as NYSE builds new datacenter
http://arstechnica.com/tech-policy/news/2009/08/nyse-builds-computer-trading-mothership-worries-abound.ars
#3 Posted by me again, CJR on Mon 3 Aug 2009 at 01:12 AM
Good article explaining how it works
Goldman Sachs, the lords of time
By Julian Delasantellis
http://www.atimes.com/atimes/Global_Economy/KH05Dj03.html
#4 Posted by me, CJR on Tue 4 Aug 2009 at 10:54 AM
Honestly, I worry about HFT. I think it has too much potential to add volatility to the market by artificially altering the trading price of stocks in high speed sculpting trades and falling into the program trading trap that we did in '87. It's going to happen, since technology is not something that can be stopped (nor should it), but the regulations around it have to be strict and heavily enforced.
Chris
http://bizconnectionsnow.com/blog/business-funding/fast-trading-potential-for-disaster/
#5 Posted by Chris, CJR on Tue 4 Aug 2009 at 10:41 PM
A mathematical economist acquaintance [not quite the same as econometrician or pure quant] at George Mason Univ. a few years ago pointed out that most of the 'sophisticated' credit risk models being used by pools, hedge funds, rating agencies and 'banks had come to depend on the same set of relations based around what is called a gaussian copula* that, in effect, created an [unintentionally] standardized, flawed model.
*"Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).
It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never
mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. ..
...
The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial."
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Hopefully the long quote drives home a message of what can develope as we move into a world dominated by ultra high speed trading performed by relatively few very large entities - 'feedback' becomes inherent and 'a future meltdown' all but certain as each struggles to maximize its particular global gain across a range of asset classes. The term uncontrollability becomes ever more appropriate.
#6 Posted by Juan , CJR on Sat 14 May 2011 at 04:52 AM