
The stockmarket is now run by computers, algorithms and passive managers - doener
https://www.economist.com/briefing/2019/10/05/the-stockmarket-is-now-run-by-computers-algorithms-and-passive-managers
======
onion2k
"Computers and algorithms" is just a synonym for people; people implement
ideas in code, design the algorithms, pick the weights for training machine
learning, etc. No matter how many levels of abstraction you go through it's
_always_ people at the top. If anything happens in the society there's
_always_ a person who made the decision to make it happen somewhere. Deferring
that responsibility to "computers did it" is dangerous bullshit.

~~~
TicklishTiger

        If anything happens in the society there's
        always a person who made the decision
    

Imagine a green field of gras.

People start walking on it. In all kinds of directions.

Slowly paths through the grass start to emerge.

Those paths attract more people to walk on those.

The stronger the path through the grass, the more people use it.

Finally, there is one clearly visible path through the grass everyone uses.

Who made the decision?

~~~
onion2k
_Who made the decision?_

The first person who walked the final path. Everyone who agreed with that
person and walked the same path compounded his decision. _Everyone_ who
crossed the field should have thought about what they were doing at the time.

Far too many people, and _especially_ developers, are way more focused on
absolving themselves from responsibility for anything bad than they are
willing to put the thought in at the beginning, and that's the root cause of a
lot of problems.

~~~
mattmanser
That's a stretch. I know you're enamoured by your synopsis, but realistically
emergent systems aren't designed or thought about. They might be tweaked.

~~~
onion2k
_realistically emergent systems aren 't designed or thought about_

I'm aware of how they work. I'm arguing that someone who builds a system is
responsible for it _even if they don 't know how it works_. Ignorance, even in
the face of a system so complex that no person could ever understand the
underlying causes of what it does, is not an excuse. No one should be able to
hide behind complexity.

Developers must either build in protections against their systems going wrong
or they shouldn't deploy them.

~~~
afthonos
I want to agree with your thesis, but it's impossible to foresee every
possible outcome. Leaky abstractions aside, bugs aside, misaligned incentives
(the new "I was just following orders", as someone here immortally put it)
aside, it is impossible to imagine _a priori_ all the ways a certain outcome
that is desirable _now_ will be undesirable in the future.

Every step of the development ladder is fraught with possibilities for error
and catastrophe. To quote James Goldman:

"It is too simple. Life, if it's like anything at all, is like an avalanche.
To blame the little ball of snow that starts it all, to say it is the cause,
is just as true as it is meaningless."

~~~
KineticLensman
It's useful to distinguish between responsibility and accountability here. The
algorithms may be responsible for a particular outcome but the people who
commissioned them should be accountable.

~~~
phkahler
What about turnover? If the buck stops at the CEO, what happens when that
person moves on? Is their successor responsible for everything that went on
prior? Im not saying either way, just asking how that should work.

~~~
onion2k
_Is their successor responsible for everything that went on prior?_

Yes.

That wouldn't even be a change to the current system. That's how it works
_now_. If you take on the role of CEO and it turns out that years earlier the
company did something terrible you will be expected to resign. It's one of the
reasons they demand so much money.

~~~
phkahler
In that case they might want a very in depth analysis of what they're getting
into prior to taking the job. How much does that happen?

~~~
AndrewKemendo
Pretty much always if the incoming CEO can competitively negotiate and is a
good hire.

Contrary to popular belief, the vast majority of career CEOs are good
hardworking people. Like any high profile position, the outliers skew
perception for everyone.

------
davidwitt415
What is missing here is the Big Picture: trading activity has totally
decoupled from value creation, and technology has sped up the process
exponentially. These are not investors, they are speculators, and it is
creating a form of technical debt that has the inherent capability to take
down the productive parts of the system.

~~~
opportune
Trading activity was never about value creation to begin with.

Non-finance people seem to think the stock market only exists for investing,
which isn’t true at all. In fact outside of an IPO you are not investing into
a company, but just trading a piece of a pie that already existed. The stock
market has always been primarily about trading, and informational arbitrage is
simply more efficient when you have computers calculating it

~~~
ElonMuskrat
> Non-finance people seem to think the stock market only exists for investing,
> which isn’t true at all. In fact outside of an IPO you are not investing
> into a company, but just trading a piece of a pie that already existed. The
> stock market has always been primarily about trading, and informational
> arbitrage is simply more efficient when you have computers calculating it

Baloney. Corporations compensate employees, management and executives in
stock. Furthermore, they may use their stock as debt collateral, or flat-out
purchase investments [e.g. startups or other companies] completely or
partially with stock. For example Facebook purchased Whatsapp with $12 billion
of Facebook shares, $3 billion RSUs, and $4 billion in cash [1].

Moral of the story: The higher your stock price, the lower your cost of
capital.

[1]
[https://en.wikipedia.org/wiki/WhatsApp#Facebook_subsidiary_(...](https://en.wikipedia.org/wiki/WhatsApp#Facebook_subsidiary_\(2014%E2%80%93present\))

~~~
opportune
What exactly are you arguing? That stock based compensation or usage in an
acquisition means the stock market isn’t about trading?

Sure, the more valuable your company is (let’s not say stock price because
really it’s your market cap and some other factors) the more it can leverage
that to make deals. Not sure how that’s related to the function of the stock
market itself

~~~
esoterica
Companies save cash by paying employees in stock instead of cash (and saving
cash is just an indirect way or raising cash, a penny saved is a penny earned
etc.) Companies cannot pay employees in stock unless the employees have a way
of eventually selling that stock. Employees can only sell stock because a
robust secondary market exists for buying and selling stock. Therefore, the
continuous trading of stock helps companies raise cash and “create value” even
after the IPO.

------
pjc50
Is this .. bad?

> FIFTY YEARS ago investing was a distinctly human affair. “People would have
> to take each other out, and dealers would entertain fund managers, and no
> one would know what the prices were,”

Was this, on the other hand, good?

If we take the doctrine that a market is a system for transforming information
into decisions through the medium of prices (see e.g. _Red Plenty_ ), then
using an increasingly sophisticated information system to do it seems only
right and natural? And that it should reduce overheads of fund management?

(As an aside, that initial-cap "F" looks really nice and is a neat bit of CSS)

~~~
MaximumYComb
The old system makes the man rich who can hire the right people with the
"right" people skills.

The new system makes the man rich who can hire the right math graduates.

It seems like we've got the same system as always. The rich get richer.

~~~
CoolGuySteve
Cool tagline. But the richest men in this industry are math graduates.

~~~
MaximumYComb
No, it's the one who hire the graduates. It's literally what I wrote.

~~~
opportune
I’m pretty sure the Rentech and DE Shaw founders were mathematicians. I’ve
heard Simons in particular is stupid good at math and there are apocryphal
stories to that effect. Wouldn’t surprise me if other quant funds were also
ran by the math-heads themselves as well

~~~
gjm11
No need for apocryphal stories about Simons. See, e.g.,
[https://en.wikipedia.org/wiki/Oswald_Veblen_Prize_in_Geometr...](https://en.wikipedia.org/wiki/Oswald_Veblen_Prize_in_Geometry).

------
_Nat_
Most of the comments strike me as negative, like the article's discussing a
bad thing. This is weird because the article itself is very positive.

From the conclusion:

> It is natural to be fearful of the consequences, for it is a leap into the
> unknown. But the more accurate and efficient markets are, the better both
> investors and companies are served.

Sure this is bad for people who wanted to do the jobs getting automated, much
as self-driving trucks are bad for people who wanted a career in driving
trucks. But if we automate away all of the jobs with machines that do them
better than humans ever could, is that really a bad thing?

I mean, sure, we'll need to rework our economic systems to adapt to a world in
which the economy neither requires nor desires human laborers -- and, yeah,
that's gonna require quite the overhaul -- but is a world in which people
don't need jobs to survive really so scary?

~~~
kthejoker2
Why such an optimistic assumption that the extreme rent seeking of today won't
just balloon to unknown heights in the wake of a seismic shift between labor
and capital, creating a permanent class of haves and have nots? Especially
once personal security, law enforcement, and military operations are
automated...

There's certainly a Brave New World style dystopia available in your scenario
where only a select few are free and even fewer are wealthy.

~~~
_Nat_
I'm not particularly worried about dystopian outcomes like that because I
don't see how they'd actually happen.

I figure that there're basically two cases:

1\. Automation kicks in slowly enough that the government isn't toppled,
allowing people to simply vote on a more equitable way of doing things.

2\. Automation kicks in quickly enough that powerful individuals can openly
defy the government, acting above the law.

The first case doesn't seem problematic. I simply can't see a society with
>99% unemployment and mass poverty, with booming wealth in the hands of <1%,
not voting to distribute the wealth, so long as they have the ability.

The second case would then have sub-cases, depending on how the powerful-
faction chooses to behave:

a. The powerful-faction chooses to comply with the government despite being
powerful enough to topple it. Then stuff turns out like in Case (1) anyway.

b. The powerful-faction refuses to trade with everyone else. Then they'd have
their own, exclusive economic system, but everyone else could still trade with
each other. Then they might not be as wealthy as the powerful-faction, but
they could still be much wealthier than people today.

c. If the powerful-faction chooses to kill-off or cage everyone else, that'd
be bad.

So, sure, there's that hypothetical scenario in which people who rapidly rise
to power would leverage that power to kill off everyone else. But, that just
doesn't seem particularly plausible to me. And most of the other scenarios
seem to have positive outcomes.

~~~
nullspace
This is fun.

Isn't there a case d.

\- The powerful faction cages everyone else, but not necessarily in literal
physical cages but rather psychological cages. Provide bare enough for
survival, and use psychological techniques to engrave in everyone's mind that
"this is fine".

I feel like this comment sounds rather edgy, but to me this is the most likely
dystopian scenario if we're anyway talking about powerful-factions >
government.

------
INGELRII
I find it easier to select what companies not to buy. It's hard to do it cost
effectively and with low risk. Short selling or put options is not the answer.

Idea for a new fund directed at retail investors:

S&P 520 index fund. It's basically just low cost S&P 500 index fund, except
that the index tracks 520 largest companies listed and individual investors
can remove any 20 companies from their index. If you don't know what to drop,
the fund managers drop the 20 smallest and the index becomes S&P 500.

The catch is how to implement this strategy with low cost. In practice the
fund as a whole would take input from every fund owner at the time they do
rebalancing. Then they would adjust the ownership of the fund based on how the
investor performs relative to the whole fund in the next rebalancing. How to
implement this may be tricky.

~~~
patio11
The name for the product category you're broadly describing is "smart beta."
This exists in quantity. "SPY but without overvalued stocks in it", etc etc.

The reason the exact product you want doesn't exist is because it will have
the same returns as SPY but cost 20X as much due to lower economies of scale,
broadly because people _don 't want it_.

~~~
devicetray0
> but cost 20X as much due to lower economies of scale, broadly because people
> don't want it.

For any existing fund manager who tracks an index (i.e. Vanguard), this
shouldn't be too difficult or expensive. They're already buying/selling a TON
of SP500 shares at the close of trading day. Now they just need to subtract
some of those buys/sell for the overvalued companies that people do not want.
Am I missing something?

EDIT: Oh, I guess the (SEC?) would require a different fund management and
prospectus for every index "smart beta" permutation, and therefore wouldn't be
realistic.

~~~
acjohnson55
Whenever I feel the need to use the adverb "just" when talking about something
I think someone else should do, it usually means my understanding of the
situation is the tip of an iceberg I can't fully see.

------
cjblomqvist
[https://outline.com/JE65Eu](https://outline.com/JE65Eu)

~~~
chaseha
Thank you

------
d--b
This completely misses the point.

The stock-market is a gamification of financing. While financing has been
invented to direct money to the most __useful __project, stock-market
transformed this __usefulness __function into a score: the return on
investment.

The problem of the algorithmication of finance is not that we don't know where
it's going, but that it's lost its objective of optimizing for utility in
favor of optimizing pure profit. This has been a problem since the 80s with
the "greed is good mentality". But that's not true, maximizing profit does not
maximize societal utility.

------
alfiedotwtf
Imagine people advocating to go back to open outcry and wining and dining
leads

------
dajohnson89
Has this not been the case for well over a decade?

~~~
Nuzzerino
AI has been a dominant force in the market since at least the 1980's.

~~~
brokensegue
citation?

~~~
maximente
my guess is he is using the acronym AI to mean statistics/modeling/inference
vis a vis actual intelligence (understanding/conceptualization/novelty)

------
otakucode
It surprises me that a multitude of separately developed systems acting in the
same 'playground' don't give rise to more emergent behavior. I would expect
accidental death spirals as systems unknowingly couple together and get caught
in a loop of failing together, along with the polar opposite of just
astronomical growth spurred by nothing but the systems bidding logic
interlocking in unexpected ways.

Sure there have been catastrophic failures like Knight Capital, but those, at
leas the ones I am aware of, all boil down to the system having flaws. I have
yet to see a system which worked and followed the logic the designers
intended, but which is accidentally (or purposely?) exploited by other
automated systems doing the same. Shouldn't the complexity of these systems
make such a thing almost inevitable and common?

~~~
1e-9
They undoubtedly do to an extent, but the exchanges use price limits, trading
halts, and mandatory nonstop human supervision to keep things under control
and allow human operators time to kill errant systems that are losing money.
Trading firms and clearing firms require additional safeguards to limit
instability and losses. Also, if some group of trading systems does go wheels-
off in a positive feedback loop, there's likely to be another, larger group of
trading systems operating correctly and taking the other side to eventually
stabilize prices.

------
Merrill
The growth of "dark pools" for electronic trading off of the stock exchanges
has also been an important development in the last couple of decades.
[https://en.wikipedia.org/wiki/Dark_pool](https://en.wikipedia.org/wiki/Dark_pool)

------
cjblomqvist
One possibly interesting consequence of this is that companies that want to
optimize their stock value may now try and find what factors the financial
algorithms are looking for and optimize their business based on that. Might be
an opportunity for some creative upper management people?

~~~
logicchains
Executives were already doing this for the factors human investors look at
(hence the "Wall St. driven short-termism" complaints).

~~~
cjblomqvist
Absolutely, I guess what I'm saying is that this might bring about new types
of factors to look for - meaning whole new categories of strategies.

~~~
logicchains
They're still going to be factors that a human already thought was relevant to
making investment decisions. Machine learning data pipelines don't write
themselves.

------
gandalfian
In theory the small investor who has the freedom of not being obliged to track
the index and is small enough not to be troubled by low liquidity could
potentially exploit these advantages?

------
starpilot
Some day we'll have central AI-planned economies, and we'll laugh at our "free
markets" of olde. Computers will allocate capital far better than humans can.

~~~
Synaesthesia
We’ll hand over economic decision making to a computer? Doubt it

~~~
InvisibleCities
You say that as if you think we will have a choice in that matter. A centrally
planned economy is the kind of numerical optimization problem that computers
are far better at solving than humans are. Eventually, some country will
implement an AI-driven centrally planned economy that will function far more
efficiently than our current market-driven model, at which point everyone else
will either out-competed by this new more efficient system, or adopt something
similar.

~~~
ryanwaggoner
_Eventually, some country will implement an AI-driven centrally planned
economy that will function far more efficiently than our current market-driven
model_

Your core assumption is that it's _possible_ for an AI-driven centrally
planned economy to be "far more efficient" than a market economy. There are
two problems here: getting your AI the information they need to make the right
decisions, and the political risks of implementing a perfectly efficient
centrally planned economy, which will by necessity cause all kinds of
suffering and death as a result of its allocation decisions (which, by the
way, will probably be guided by value judgments made by humans, but I
digress). Both of these are huge challenges, and it's not clear to me that
either of them will be easier to accomplish with a AI-driven planned economy
vs. a pure market economy (which also has its problems, I know!). They're
ultimately just two different kinds of algorithms, and it's unclear to me that
the top-down centrally planned approach is necessarily better, even given
general AI and tons of input information.

------
totaldude87
Ok time for a stupid question: if machines trade 90% who is on the other side
of buying , or if a machine (or algo or whatever) sells to another machine,
cant it be manipulated?

------
deepnotderp
Old news. Companies like rentech have been doing this for decades.

------
yumraj
Anyone who thinks this is a good thing should read Flash Boys by Michael
Lewis, and look into front-running and HFT.

~~~
goldstone26
Flash Boys is written to entertain, though, not inform. It is littered with
inaccuracies and dramatization to the point of lying.

Front-running, for the record, is illegal and nobody does it. Michael Lewis
perverts the phrase to mean "using publicly available information and
extremely expensive- though publicly available- radio technology to move stock
information faster than competitors". Which you might still think is "unfair",
though I would argue it's only unfair in the same sense that WalMart and
Target make it hard for small shops to compete because they can't afford
ultra-efficient trillion dollar supply chains. It's not illegal, it's
objectively more efficient, and the only thing that prevents anyone from "just
doing it too" is capital.

"Dark Pools" by Scott Patterson is a much more educated and in-the-know look
at electronic trading.

~~~
yumraj
>> Front-running, for the record, is illegal I didn't get the sense that it is
illegal from the book. Could you please elaborate what you understand by front
running and why/how is it illegal.

>> Michael Lewis perverts the phrase to mean "using publicly available
information

Per my understanding Michael Lewis is referring to the fact that HFT firms
were able to race faster than the original trade executions and execute part
of the trade, due to it being spread over multiple exchanges with different
latencies.

While this may not be illegal, it surely sounds unethical.

~~~
1e-9
> I didn't get the sense that it is illegal from the book. Could you please
> elaborate what you understand by front running and why/how is it illegal.

Front running involves placing a trade based on nonpublic information. It's a
type of insider trading that has been going on for at least hundreds of years
and it has nothing to do with HFT. The classic example is a broker placing
orders ahead of their own clients in order to profit off the market's reaction
to the client orders.

An HFT system placing orders based on public data feeds is not front running.

------
mongol
How are inputs entered into these systems. Consider for example Trump's
decision to withdraw US from Syria. I assume there is a human somewhere that
needs to tweak a variable "Conflict risks in the Middle East" or something as
soon as possible after this news breaks? That can not be automated... or?

~~~
posnet
It's now just a built feature of a traders bloomberg terminal.
[https://www.bloomberg.com/company/press/bloomberg-
launches-t...](https://www.bloomberg.com/company/press/bloomberg-launches-
twitter-feed-optimized-trading/)

