I was driving home from work around 2:30pm on a bright May day in 2010 listening to the news of the first Flash Crash. I couldn’t believe what I’d heard. In the short span of 36 minutes, the Dow had wiped out trillions of dollars in trades, 9% of the market, and gradually recovered. I wasn’t alone. Most people didn’t know what happened. It was a bizarre event caused by mathematical computations, known as “algorithms”. It took five years for the Consumer Financial Protection Agency to understand the problem enough to regulate some forms of algorithm trading.
The Financial Services Industry employs thousands of physicists and mathematicians to design trading platforms and products capable of making millions of trades in micro seconds. These tools act 34 times faster then a human being clicking a mouse. In trading, the object of the algorithm is to seek investment opportunities before a human being has the opportunity to press a button to buy or sell a particular stock or Exchange Traded Fund. Why are algorithms important? They make up 70% of all trades. These cleverly designed equations create the market and make the most profits. The system is rigged.
“Because the system is controlled by high speed traders and derivatives,” Buffett has said, “value my stock based on the quality of my businesses not our stock portfolio.” That makes sense. Otherwise, those who are continually questioning why does the market go up or down, will be forever clueless, unless we have an equal advantage.
So what is an algorithm? It is a mathematical computation, designed by physicists and mathematicians to achieve a specific goal . Want to get the best possible price for an Exchange Traded Fund? It’s simple. Program the algorithm to hunt for the lowest price; merely hunting for that price creates the market for the lower price. Meanwhile, the customer or large institutional investor has the ability to swoop in and buy at a profit. The algorithm has now created the market. This is the beginning of Artificial Intelligence. In several years time, quantum computing will surpass the speeds that we’re seeing today.
Why do I care about algorithms? At first, my concerns centered on the financial markets. I wanted an equal advantage to trade. I’m old school. I like value investing.
In today’s market place, hi speed trades and derivative trading make huge bets in the marketplace. The derivative market was a quadrillion dollars at the beginning of 2017. As a taxpayer, if I couldn’t play their game, I wanted to take risk off the table and share in the derivative and high speed trading market. I determined, if “We the People” could tax these financial products 6 cents on every $100.00 traded, the Federal Government would reap about $660 Billion Dollars, enough money to fund a massive infrastructure program with “Feinberg” like monetary controls. It was a thought: TaxRiskStopInequality!
Kevin Slavin’s Ted Talk”, How Algorithms Shape our World! clearly defines how algorithms shape our lives in Finance. If you listen to his 15 minute video, you’ll begin to understand the ramifications of algorithms in our lives. https://ted.com/talks/kevin_slavin_how_algorithms_shape_our_world?utm_source=tedcomshare&utm_medium=email&utm_campaign=tedspread–b
On 5/19/2015 , I wrote about algorithms and derivatives in my post Posthttps://wordpress.com/post/thevoiceofjoyce.me/13780
You may ask yourself, “why should I care?”; I’m no longer in the Market. You are in the market, if you have Pension Funds? “We the People” have to care, algorithms have pervaded our lives beyond Wall Street.
How do you think Russia and the Trump Campaign Team skewed the election of 2016? They used the expertise of Facebook, Google, and Twitter to generate targeted ads, 100,000 of them daily, to their known customer base. They created millions of ads based on people preferences that were predetermined, using mega data. Our mega data is provided by “We the People” every time we search a platform or click a “Like” button. We give away this data for free! We ‘ve allowed ourselves to become the inadvertent victims of algorithm hunts for what pleases us.
Financial Times, Is Facebook spinning out of control over Russian revelations? — Hannah Kuchler in San Francisco and Barney Jopson in Washington — Read the full article at: https://www.ft.com/content/8d61b8e2-acd5-11e7-beba-5521c713abf4
It wasn’t just Facebook spinning out of control, any of the search platforms could be and are involved. For a price, you too, could harness mega data. The Russians have a Troll Farm outside Moscow, where they launch their “Bots”. Unless we regulate and have humans oversee the work product of algorithms, we will continue to live in a world of chaos. Regulation and ethical concerns bring order and security to our Democracy. Who knows, if we’re really clever, perhaps we could safeguard our data, collect a few pennies and protect our Democracy from foreign and malevolent intrusion.
Our Democracy is doubly imperiled by the use of algorithms in the gerrymandering case before the Supreme Court. Wisconsin employed algorithms to shape their political maps, skewing the districts to always provide for a GOP win statewide, even if Democrats were the majority voting block in the State’s cities.
Here’s a link from The New York Times that I thought you’d find interesting:
I thought you would be interested in the following story from The Wall Street Journal as well.
Math experts join brainpower to help address gerrymandering.
If all these man made crises we’re bad enough, the algorithms will continue to disrupt our world as quantum computing becomes more readily available. That’s why we need responsible legislation now to protect our Democracy. We need regulators capable of understanding these complex systems and transparency in their methodology. Otherwise, Americans can be manipulated and worse, defrauded of all we possess. We should be scared, very scared, as our thoughts and data are used against us and not for “We the People”.
Admittedly, the genie is out of the box. Now we need to control those eager to use this technology for personal gain. For you science fiction buffs, the first rule of Robotics was “Do no harm”!
I thought you would be interested in the following story from The Wall Street Journal.
Nascent Quantum Computing Poses Threat to Cybersecurity
Can mathematicians and physicists serve our nation equally well and help create and innovate new products and plans for our future, using mega data to create highways and city planning faster and cheaper? There is no limit to the use of Mega Data. Everything we do can be optimized, from the creation of drugs, to genetic therapy, to design and the manufacture of goods, to targeting our kids for an advanced quality education. We are on the cusp of using this new technology for the good of the people. Let’s not lose sight of the fact that this technology, while temporarily in the “wrong hands”, can be fine tuned to create an equal and opposite effect.