The Existential Threat of Algorithmic Trading

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Most of us are well aware of the problem of human labor being displaced by technology. The Thought Infection blog recently posted an informative overview of how even jobs we might not immediately think of as being at risk of obsolescence are steadily being encroached upon by technology. In this follow up article, he explains how automation has an especially destabilizing effect on the financial sector and economic system.

Excerpt:

The advent of algorithmic trading extends the game that has always existed in markets, but now the speed is faster, the stakes are higher and we can’t be sure who is in control. 

The manipulation abilities of trading algorithms may already (and if not, soon will) extend beyond this kind of inter-algorithmic effects. Given that trading algorithms can act on human informational sources, such as Twitter, as news is released, it is not outlandish to imagine that these algorithms could also be producing information in an effort to manipulate the market. Given that algorithms are becoming better at turning basic information into natural language, it seems possible that an algorithm could be designed to Tweet out false information about a company to try to depress the stock price.

If we take the ketchup manufacturer again and we imagine they are in a precarious position due to a new bill to remove subsidies for tomato growing. Imagine a bunch of tweet/comment/news bots aimed at pushing the public dialogue to make it seem that the subsidies are going to be removed. If massively parallelized, this kind of attack on public sentiment could have a significant effect on the ketchup manufacturer and provide an opportunity for major profits. I think it’s likely this kind of algorithmic sentiment manipulation is already happening on some level.

Even this kind of sentiment manipulation is only a drop in the bucket compared to what may become possible in the near future. The astounding profits which can be made in this kind of algorithmic trading is driving huge investment in artificial intelligence. In the near future, algorithmic traders will be capable of much more complex manipulations to try to move market prices.

…Perhaps by identifying those congressmen who are on the fence about subsidies, a targeted campaign to manipulate the opinions of those in said congressman’s district could have a real effect on the outcome for ketchup manufacturers. This may seem a bit ridiculous, but even a tiny effect on the perceptions and opinions of one individual can make a big difference if spread across a wide enough group.

Read the full article here: http://thoughtinfection.com/2014/01/05/the-deep-end-of-decoupling-the-existential-threat-of-algorithmic-trading/

What he speculates could be our greatest threat in the future is not Terminator-like cybernetic weapons but “an army of Gordon Gekko-bots capable of manipulating every aspect of our legal and political systems in an aim to maximize market profits.”

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4 Responses to The Existential Threat of Algorithmic Trading

  1. Nolan says:

    As trading in the markets was at one time a great interest of mine, I must say that Thought Infections blog on this matter is way off base. First, to be clear, I will limit this comment to the commodities market, as the stock market IS just a casino and doesn’t really affect the lives of people who don’t gamble there. Thought Infections premise is that high frequency trading exacerbates price manipulation. However, he is precisely wrong on this matter, HFT actually provides liquidity and EVENS OUT price fluctuations. The commodities market is a zero sum game. Meaning, unless these trading companies want to take actual delivery of a ton of tomatoes(the example he uses), they must sell that contract before it expires(thus lowering prices). In the long run, prices are set by traders who will TAKE DELIVERY. Now, can HFT TEMPORARILY affect prices, yes. However, also realize that the manufacturers today are also very sophisticated and hire professional traders that may or may nor use HFT to procure needed commodities for them, and in turn, the consumer, for the best possible price. This is a red herring, and oft used one at that, to fan the flames of class warfare. The REAL price manipulation is going on at the Federal Reserve level, that’s where your purchasing power is being destroyed, not at the commodities market.

    • Thought Infection does acknowledge that allocating capital for maximum profit are what algorithms are supposed to do, and in a sense they’re only doing what human traders do but much faster. What his main concerns seem to be is the growing dependence on algorithms and automation which can lead to an increase in chaotic feedback loops out of human control. And as AI goes beyond the “uncanny valley”, it may not be immediately apparent if one’s choices (and in a larger scale, government policy) are being influenced or manipulated by algorithms, which could be just one of many economic weapons used by groups and individuals associated with the Federal Reserve and Wall Street banks.

    • @ThoughtInfected says:

      I think it is important to make the distinction that algorithmic trading is not limited to HFT. Whereas HFT can fill in some of the informational market inefficiencies, algorithmic trading can go a lot further. As opposed to HFT, data mining algorithmic traders are being developed to game the markets. At this point it seems primarily aimed at gaming other algorithms, which could set up a dangerous situation where market fluctuations become increasingly divorced from human reason. As Luther Blissett points out below, this leads to dangerous feed-backs which can lead to strange and chaotic movement, as seen in the crash of 2:45.

      Wall street stands to make a tonne of money off of AI in the field of algorithmic trading, and they know it. I am convinced that in the near future advanced Wall Street AI is going to “leak” out and have effects on wider systems of public discourse, politics and the legal system.

      Thanks for posting Luther

      • Nolan says:

        Is there an actual real life example of algorithmic trading causing real life problems you say it could? The only example Sean Gourley gives is in his incoherent gibberish of a presentation is that of natural gas temporarily had a 10% price drop. Like many scientists today, he has his eyes in the microscope so to speak, and completely fails in seeing the big picture. Natural Gas companies WILL NOT sell futures contracts for less than the price of production and energy utilities WILL NOT buy futures contracts for more than their customers are willing to pay. Is there any real life example of producers not producing because of futures prices being too low caused by algorithmic trading, causing real life shortages? Conversely, are there any examples of utilities or manufacturers going out of business because they bought commodities at too high a price and couldn’t sell their product due to algorithmic trading? Even if there is a company that went out of business because of this, it means it wasn’t a very smart company and the free market is better off without it. The poster child of the dangers of algorithmic trading seems to be the flash crash of 2:45. I just don’t see the “existential threat” that this caused. Who died in this crash? Finally, algorithmic trading is a tool, and of course IS being used with greedy intentions, but how is this any different from any other tool man has created?

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