Algorithms Replace Human Traders On Wall Street


As the systems that govern the stock market are replaced by faster analysis and trading, algorithms and artificial systems are the new ecosystem controlling our collective investments.

Perhaps, the 21st century will be defined in how we gave over, once and for all, the controlling interests of the United States to the synthetic systems we created. No human error, no greed, no psychopaths, no empathy, no brow sweating, no shouting, no fighting for dominance; only the math and the direction of information from emergence coming out of neatly arranged servers on Wall Street.

Take a look at CNBC on May 6, 2010, with a whole command post of "experts" talking over each other in an effort to show that they know what they are doing; that they know what is happening.

There's an image live from Athens showing nothing but people walking, there are tickers scrolling across the bottom and top of the screen, precious metals refresh on the right hand side every second, all while the Dow Jones plunges over 1,000 points by the end of an 8-minute video. In the background, there is the noise from the floor of Wall Street that sounds like the end of the world ("wow! Four-hundred and cruising!").

It's a screen of total confusion; complete with that guy Jim Cramer saying things like, "hot money" and "this is kind of interesting now" to the left of "live from Athens." What CNBC showed was a marketplace no longer being dictated by human trading. All of the jargon and all of the confidence in the world was not going to hide the fact that on May 2010, CNBC and the rest of the nation had no idea what was happening. We live in a time where algorithms control all of the trading on the stock market to such an extent that humans really have no place in the room.

And if we do want a place in the room we have to have a fundamental knowledge of how our programs are working for us, or rather, beside us because the algorithms are going to keep making the trades faster and the stock market, for humans, is going to become more and more of a spectator sport.

We live in a world of fast algorithms that works beyond the speed of thought for humans. As Kevin Slavin points out in his TED Talk, we are moving mountains, literally, just to lay the fiber optic cable for the algorithms to work in ways that we (humans) can't. We are in an age where we are working for the programming.

Following the dramatic 1,000 point drop in 20 minutes, circuit breakers were turned on that halted the trading and after everything took a breath, the market, collectively, rose back up to where it was before it began to drop.

And no one, to this day, is really sure what happened.

What became known as the Flash Crash of 2010 has taken months (years even) of sorting through the remnants of data to piece together a story about what happened. In a report by NPR, the flash crash was most likely attributed to a massive 75,000 futures sale by one company with contracts worth $4.1 billion. The algorithm used to make the sale failed to take price into consideration and as a result, the price of the futures began to drop sharply as the futures were sold. This caused other algorithms to react accordingly and there was a stock selling frenzy resulting in a 1,000-point plunge.

It was one rogue algorithm (as Popular Science calls them) that caused the entire, fragile market to plummet and it took five months of research to compile the report that accounts to a "probably, maybe" answer.

While we live among computers making trades and controlling the stock market largely while humans look on, it is not an entirely unwelcome scenario. Algorithms control the market in ways humans could never dream of doing. Using emergence theories, algorithms are able to sift through astronomical amounts of data and make decisions based on patterns alone. Not to mention, we are entering the age of big data, so programs will be able to hold more data, process it and retain it in ways never before achieved by computers. Soon, everything we input into a system anywhere will have an influence over how we live and how stocks are traded on the market.

Everything will be a reaction and a prediction based on nothing but raw data guided by a program free of human error. As Felix Salmon and Jon Stokes say in their article for Wired, "at its best, this system represents an efficient and intelligent capital allocation machine, a market ruled by precision and mathematics rather than emotion and fallible judgment."

But, while this system may be calculated and efficient, it also presents the problem of being beyond the understanding of humans, or at least it takes us a very long time to realize what just happened. We are entering an age where all information can now be processed, stored, remembered and used. Nothing we do is erased and everything we do has an influence on what happens on the market system.

We are in an age of such efficiency, that we can no longer compete with the speed and flow of the market. In a sense we have created what we have been pushing for; the fastest, most efficient ways to trade debt around the world. But, sadly it will be a world where talking heads on the news will throw around words we comprehend but just filter out not really understanding.

Maintaining an orderly and fair market in the 21st century will involve not seeing what is happening and reacting, but understanding how the algorithms will think about something. Or at least understand that the trading on Wall Street may soon become something that we don't understand at all. It will be realized over time, as Mr. Slavin points out in his talk, that the laws of algorithms will become new 21st century laws of nature and where they guide the market will come from much more organic and intrinsic knowledge than humans will ever be capable of having.

While human bodies have lost their place and purpose on Wall Street and pundits such as Jim Cramer try to maintain their relevance as gurus of the market, it's not the end of the world; it is simply a change of time. At the very least, there is beauty and rational order to what is produced on Wall Street.