
The rise of the financial machines - hourislate
https://www.economist.com/leaders/2019/10/03/the-rise-of-the-financial-machines
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lawrenceyan
Machines took over finance a long long time ago. The big firms like
Renaissance and D.E. Shaw that ushered us into that age were all largely
founded in the 80/90's.

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nightski
A few players using them effectively is different than 30-60% of the market
being run by algorithms. Granted I can't read much of the article because it
is behind a paywall which seems to be very common on HN.

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pmart123
You have to account for the fact that a lot of the algorithmic volume is due
to ETF arbitrage. We now have more ETFs than stocks in the US by a wide
margin, and each new ETF likely creates another trading opportunity. There are
also a lot of factor and smart beta strategies now, which I would classify as
more systematic, but these could distort the market more than arb strategies.

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cmroanirgo
Not disagreeing with you, but the arbitrage generally lasts only for a few ms,
which makes the article's comment incorrect:

"Visit a trading floor today and you will hear the hum of servers"

In my experience, the machines doing the actual trades are as close as
possible to the exchange, generally inside. What's in the trading floor are
the client and ML programs that issue the strategies. That said, I've been
away from the industry for a few years and it might have changed.

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zarro
"Machines are taking control of investing..... Funds run by computers that
follow rules set by humans"

If the rules/algorithms are set and monitored by humans, the humans are the
ones ultimately responsible. Computers are just tools which provide greater
utility and control for investors than ever before.

That comes with its benefits and also with its potential downsides, but does
not lessen from the fact humans are ultimate responsible.

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asdfman123
Humans may be ultimately responsible, but I think it's pretty clear that the
more that decisions are made algorithmically, the less accountability firms
running those algorithms take.

If there aren't people involved at every step of the way to inject humanity
into decision making processes, it's much easier for companies to hide behind
their "algorithms."

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salawat
There is a reason algorithms are considered a laundering mechanism for
accountability.

I believe the blossoming buzzword for it may be Mathwashing.

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cryptica
It's disturbing that machines are the ones making investment decisions
concerning human needs. It explains why real innovation has stalled.
Algorithms can only make predictions based on existing trends and data, they
don't actually have a vision for how to improve human society.

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opportune
These machines are just trading and making value calculations on existing
markets, not directly investing in businesses. I would hesitate to use the
term “invest” at all, I think the term “allocate” is much more accurate

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qntty
[https://outline.com/nGrnKy](https://outline.com/nGrnKy)

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dsjoerg
I see no annotations on the article, why did you post this link?

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pyromine
Outline can be used to bypass the paywall

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H8crilA
Also, it's a long and annoying HN tradition to post the outline link (useful)
without mentioning that it just bypasses the paywall (not useful).

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ZhuanXia
If homo economicus does not exist we must surely be obliged to create him...

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LatteLazy
I never thought about it before but that's exactly what corporations are meant
to be: "personhood"s that think only in economic terms. People get lazy and
they run out of greed once they become millionaires and they want abstract
things like love or popularity.

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HappySweeney
> they run out of greed once they become millionaires

In my experience, the opposite happens.

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usrusr
But they still don't turn into homo economicus. If they lose all care for love
and popularity they might just as well find other outlets for irrationality,
like bravado, hubris and generally taking things too personal (worst trading
strategy ever).

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deepnotderp
Quant funds have existed for a very long time. Rentech has been using neural
nets, HMMs, speech and language processing in some capacity for decades

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objektif
How do you know what they actually use? I thought they are super secretive.

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darawk
Things leak. And knowing which models someone uses aren't that important. The
devil is in the details of all these things. Which datasets, what features to
feed in, how to clean them, etc.

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deepnotderp
It's actually my understanding that the core of Medallion is the data
processing engine. The models themselves aren't that much more advanced than
everybody else (iirc). Rather, financial data is extraordinarily noisy and
often not i.i.d. and thus things like deep networks, applied alone, will drown
in noise. The use of techniques from advanced statistical signal processing,
information theory, conpressed sensing, information geometry, etc. allows the
data processing engine to automatically and _autonomously_ extract this signal
from a sea of noise.

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darawk
Ya, that's likely correct. It's all about how you transform the data you feed
into the model, and which data you choose to look at, not to mention how you
group companies together. That part is huge too. Once you've done all that
correctly, off the shelf ML models will solve your problem just fine.

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deepnotderp
It's my understanding that RenTech essentially takes in any data and lets the
pipeline figure out what's important.

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ilaksh
I am hopeful that wide deployment of decentralization technology can help
monitor and aggregate real world data relevant to human needs so that these
algorithms can be tunes to serve people in general rather than the 1%.

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mfoy_
If this even remotely interests you, then I'd highly recommend "Homo Deus: A
Brief History of Tomorrow" by Yuval Noah Harari

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objektif
As someone in the industry I would caution everyone techy to take such
articles with a grain of salt. Most of these articles are PR pieces by WS to
lure tech talent. Yes tech is making a huge impact and it has been for a whole
but not replacing everyone.

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FillardMillmore
I'm still waiting for an AI that can help me invest in the most lucrative
Dutch tulips.

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H8crilA
This is known as "tech unicorns" these days.

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yannis7
Agree with comments. Not only quant funds have been around since forever but
in fact the new trend is in a hybrid approach of discretionary/fundamental &
algo/quant strategy -- see DE Shaw article on their "quantamental" approach
in:

[https://www.ft.com/content/0364850c-3ebf-11e9-9bee-
efab61506...](https://www.ft.com/content/0364850c-3ebf-11e9-9bee-efab61506f44)

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pmart123
There's a lot of opportunity in human aided systems, i.e. CEO says they are
getting a lot of new web traffic after a redesign, but aggregated website
analytics show that it isn't the case. Using credit card data in retail, etc.
to either trade around a position, or inform a thesis, etc.

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neonate
[http://archive.is/p3RKW](http://archive.is/p3RKW)

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known
"Machines are taking control of investing—not just the humdrum buying and
selling of securities, but also the commanding heights of monitoring the
economy and allocating capital."

I think machines investing is less than 1%;

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mruts
Total US equity market cap is around 30 trillion. Total money in ETFs is 4.5
trillion. So at the very least machines are investing over 10% of capital.
Probably more like 20-30%

Of course this only US and only equities, but it's still well above 1%.

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abbadadda
> Industries from pizza-delivery to Hollywood are being changed by technology,
> but finance is unique because it can exert voting power over firms,
> redistribute wealth and cause mayhem in the economy.

This is quite the sensationalist bullshit. What does this even mean? The rest
of the article is paywalled, so I don't know for certain where the author is
going with this, but what mayhem is there to speak of?

As noted by other commentors, retail investors are much better off these days
because of tightened bid/ask spreads.

After working in HFT for nearly 10 years I've learned the firms that do the
best do so by proving value to the market. Through competition with one
another, retail investors are much better off by getting better prices from
market makers who do a better job.

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mruts
This article isn’t very good or informative. Many, maybe even most, of these
“black-box” strstegies are derivarive of work done over 40s years ago at
Chicago. Certainly there are a few firms doing truly innovative work such as
RenTec or 2 Sigma. But a lot are like AQR: just using publically available
academic knowledge but doing it better than everyone else.

Also I think this article is overstating the prevalence of quant strategies
and funds. At my old portfolio analytics firm, we had hundreds of hedge fund
clients and not a single one was doing fully automated trades. Of course they
had optimization engines and tech to squeeze a few bips here and there, but
the fundamental ideas were still generated the old fashion way (through sleep
deprived analysts).

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JackFr
> (through sleep deprived analysts).

You misspelled 'material non-public information'.

