Quant AI Picks Stocks Better Than Humans 446
Mr_Blank writes with this excerpt from an article at MIT's Technology Review:
"The ability to predict the stock market is, as any Wall Street quantitative trader (or quant) will tell you, a license to print money. So it should be of no small interest to anyone who likes money that a new system that works in a radically different way than previous automated trading schemes appears to be able to beat Wall Street's best quantitative mutual funds at their own game. It's called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes — and it never holds a stock for longer."
Re:Bullshit (Score:3, Interesting)
Time for Restrictions... (Score:3, Interesting)
This type of day-trading provides absolutely no value to the economy and should be regulated to death. Also, I have a hard time believing it would work in the long term, as the news is a lagging indicator 90+% of the time. It might work for shorting in that respect... but even that would be too late and high risk.
All these quant systems seem to do is increase volatility at the expense of the market establishing a general direction.
I'm all for an IRS withholding of 1% on sales of assets held less than a week, and I am a fairly active trader.
This has already been happening (Score:5, Interesting)
Re:Bullshit (Score:5, Interesting)
Exactly; especially when taxpayers worldwide are free to pay billions to revive banks and companies are free to take shortcuts every way they want (if things get really bad, there is always chapter 11).
CC.
Re:Bullshit (Score:2, Interesting)
Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market? I'm not sure I buy it completely either, but I do believe there are some benefits.
In theory but the fact of the matter is that when others start to sell or buy, everyone starts to do the same. These trading strategies actually increase the volatility of the market.
Re:Bullshit (Score:5, Interesting)
I don't think it does much for market irrationality. It does provide liquidity, though, which is good in reasonable amounts: means that if you want to buy or sell a stock right now, you don't have to wait for another long-term investor who wants to make the opposite transaction, but can buy from or sell to one of these people who are always churning their holdings.
It can be a problem if this sort of statistical-trading volume swamps the "real" trading, though. Ideally an exchange is supposed to send price signals that reflect some sort of external supply and demand, but if, say, only 5% of the market participants are normal market participants, and 95% are trading with 20-minute horizons based on statistical models, you've got a weird feedback-loop market that reacts mostly to itself.
Re:Bullshit (Score:2, Interesting)
Transaction Cost? Impact? Fundamentals? (Score:3, Interesting)
A trade every 20 minutes would generate an obscene amount of transaction cost. These are the costs associated with stock trading and any successful Trader/Manager team would seek to minimize these things and create a strategy that maximizes gain for the least amount of trades. Given this system is trading so frequently it would seem to assume zero transaction cost. Quite
I would also think that any more than a few of these trading bots would create a market impact that would nullify the advantage eventually.
Its also kind of weird to invest based on information that is not reliable, or not stemming from the fundamentals of a stocks earning potential. Creating portfolios based on glamour, popularity or essentially inefficiency is a disaster waiting to happen. These gimmiks will work until a catastrophe happens, but by then so much more is committed than is was ever prudent and the damage is done. Investing based on artifacts or involving anything you don't understand with your own 2 hemispheres means that you as an individual are being manipulated and you are investing for irrational reasons.
Unless this technique can be balanced or controlled in a risk management context, or understood at a low level to behave in parallel with existing market benchmarks, then only the penultimate fool would see this as responsible investing and not patent gambling and recreation with your surplus funds.
While I see the expectation of any product to magically increase in value over time as fundamentally insane, there are securities that can offer utility in markets. If this kind of information is really that valuable to a majority then it will eventually be securitized. If this is something that only a minority can exploit and is not private information, some Tony Soprano somewhere in the world will call it illegal. And thats the other reason not to bother - because none of the markets are truly open and will never be truly efficient while goverments are waiting to intervene. Maybe there is opportunity in the many small irrationalities of the human mind since the market participants are almost all human. What else could this information harvesting be capturing besides some departure from fundamental consideration? If the fundamentals are considered and reflected in the price, then any other change is short term and technical, to be nullified.
I should watch what I say lest I bump up Apple stock!
Re:Bullshit (Score:4, Interesting)
Well, if the stock exchange is used as a casino, maybe they should use the same rule casinos use: If you win too much, you are not allowed to continue playing.
Re:Time for Restrictions... (Score:3, Interesting)
Sure, it "makes a market" -- in that it increases the probability that someone will be available willing to buy at some price when someone is willing to sell, and vice versa -- but it does so by divorcing that market from the thing that make markets efficient at realizing utility, to wit, the proximity between the market actors and the costs of production and/or benefits of direct use of the things being bought and sold.
Natural liquidity in a market may have particular benefits, but mindlessly chasing liquidity as an unqualified good is idiotic.
Re:We need to fix our regulations. (Score:3, Interesting)
Without them we'd see most of the wealth of this country flow up to a select few.
This happened long ago. Anybody remember Mr. Gates or any other CEO and Golden Parachutes and Bail Outs and Bonusess. Most of the wealth of this country is already in the hands of the few.
Re:Bullshit (Score:1, Interesting)
Actually, it was poor risk analysis that led us to the most recent disaster. I doubt short-term trading has very much to do with market failures, unless you're referring to the (rare) occasions when the Dow suddenly drops 700 points due to some trading algorithm run amuck.
Strangely enough, the free market will also end up reversing this trend. When people start realizing that the paper they're holding - stocks that don't pay dividends - is essentially worthless, they'll flock back towards dividend stocks, and companies will start issuing dividends again.
If you really think the free market is horrible, read a few books on economics. If you're not convinced by the end of those books, you haven't been paying attention.
Re:We need to fix our regulations. (Score:2, Interesting)
I think the point is that nobody does, but that taking a risk like that leads to a big reward.
It's not a risk for a rich person, but it's a risk for one of us to become rich. So what if we can't afford to risk very much? Some of the greatest companies in our nation were founded by people like us who took big risks with very little money and were very successful. Hell, we wouldn't have a lot of innovations in our country like light bulbs and cars without people who thought they had a good idea and went for it. Investors in those cases were rich people who saw an opportunity to become richer.
The rich get richer and the poor get poorer because of your attitude that no risk is worthwhile. It's crippling, self-limiting, and I'm tired of hearing about it. "Waaaahh, woe is me! I can't afford to take risks! Nobody ever gave me a chance! Can't you see that nobody ever gave me a chance!?" You have to give yourself a chance. Maybe you'll fail. But if your ideas are good, and if you're intelligent, you can succeed.
Re:Bullshit (Score:1, Interesting)
Scalpel, please.
Re:and it never holds a stock for longer (Score:3, Interesting)
Gambling is based on odds and randomness. Investing is usually based on performance of companies, which is not random. Yes there is speculation in investing but at its foundation most (traditional) investing is based on how well companies do. Gambling is based on chance.
Depends on what type of gambling you're talking about. Playing slot machines or roulette -- yeah, that's chance and nothing more. But playing poker, or betting on a horse race, is not purely on dependent on chance by any means. A good poker player can clean up over a bad one even if he has bad luck with the hands he's dealt. Horse-race bettors who know about horses, jockeys, and tracks, and who understand the interactions between them, will make a lot more money than those who don't. Obviously, there's still a good amount of luck involved too.
I'd say traditional investing "buy and hold" is a lot like cards and horses. Certainly stock pricing isn't deterministic -- either there's a lot of pure randomness involved, or it's a chaotic system in which it is actually impossible to find and integrate all the information which will move a company's stock price up or down -- but there are also real trends in the noise, if you can find them. Millisecond trading is more like slots and roulette, because the real factors that contribute to a company's value (new products, changes in management, etc.) don't change that fast, and any profit you make is going to be the result of getting lucky with the noise. Systems like the one described in the article seem to me like attempts to make high-speed training more like traditional investing.
Re:Bullshit (Score:3, Interesting)
no no no, you don't turn this around on me, I was replying to a post that declared that US economy failures are due to Free Market failures, I am showing that there is no Free Market and thus the Free Market problem is a red herring, nothing more than that.
Would I prefer Free Market to what is happening now? Surely. However that is not the question at hand, the question is: what is failing. Saying that Free Market is failing is disingenuous at best because there is very little Free Market what is happening here.
The Bazaar and the Constabulary (Score:1, Interesting)
Or to it another way, the presence of constabulary in a marketplace does not make it any less free, because they have no influence on the prices.
Re:Bullshit (Score:4, Interesting)
Re:We need to fix our regulations. (Score:2, Interesting)
I like what you wrote. let me add a few points from my observations to it ...
I have found that when people are grouped in less that 105 people, the work together rather well, for some odd reason most people can't recall the names and address of there co-workers when it exceeds 120. to this day I try to keep groups of people that work together to 100 or less. all my teams are basically small business working on the project together from money people, marketing, design and production and regular labor.
it seems to work for me.
that, and... (Score:3, Interesting)
...charge a normal goods sales tax on the transaction. Why should stock sales be different from selling anything else? That will slam the kabosh on these fast computer trades.
Re:Bullshit (Score:3, Interesting)
disasters? Do you mean the kind of disaster that brought up the standard of living for everybody across the board?
For who? For us? Or for the people who suffered from things like the Union Carbide disaster in India? Or the pollution fueled economy of China where we get all the cheap crap we want? I suppose wearing filtration masks are a big step up.
Or how about a few depressions, which always hit the middle and lower classes harder than those on top of the pile. For example, the late 1800's saw quite a lovely depression. No Fed necessary.
The only reason the standard of living has increased for everyone overall is because government stepped in and said you can't treat your workers like shit. Period.
The kind of disaster that lead to the greatest progress in the history of the human kind?
I welcome those kinds of 'disasters'.
I guess that all depends on which side of the fence you sit on I suppose. For example, there 6-7 billion people on this planet, and most of them do not really get to see or feel this progress. However, we do appreciate the cheap labor to fuel our progress.
Then there is the poisoning of the planet, consumption of non-renewable resources at an alarming rate, weapons that can kill millions, etc. . The progress of humankind has come at a tremendous cost. But our free ride won't last forever.
You'd be hard pressed to show any time in history before the industrial revolution and the creation of capitalism that lead to the same levels of increase in overall standard of living, in everybody's ability to get access to the best that the people could ever provide.
Most major civilizations had a golden age where, more or less, everyone had a better standard of living compared to others of their time. Capitalism has been around for quite some time.
As far as access to the best provided services, we don't have that. If you have the money you do. If you don't, you become a debt slave, or simply suffer and/or die. Free markets don't provide services to the poor masses, the government does.
You'd be hard pressed to show any time in history before that lead to the kinds of innovations, discoveries and inventions that became possible due to concentration of capital through savings and investment into businesses.
Uh...no. The Greeks, Romans, Egyptians, Chinese, etc. all made plenty of innovations discoveries. Later on, during the age of enlightenment, more innovations and discoveries were made.
I HOPE people are assholes, that's the only way that we get progress, because assholes want to have it all and to live better and they work on it pushing the progress forward.
Progress at all costs? The ends justify the means? You sound a lot like a "visionary" dictator, which has rarely turned out for the best.
people don't play fair, I hope they don't otherwise we'll have the 'fair hell' on this planet.
Ah I get it. So it's okay, in your view, to destroy other people in the name of your own progress. Got it.
The one single problem is that the political system needs to be controlled to make sure nobody can take over it with simply money, that is a problem and we are STILL Learning how to do this right.
And free markets would do this precisely how? Without regulations on what a company can or cannot do with it's money, how precisely would you ensure that companies/owners weren't doing inappropriate things with their funds? Without regulation, how would one check the books to ensure a company was behaving itself?
you are wrong. Free Market is the ONLY single tool that allows progress and simultaneously brings down the prices through competition.
Oh competition. Right...right. Forgot about the competition. But exactly where does the competition come from?
In a free market, wha
Re:No, your explanation is also bullshit (Score:4, Interesting)
In case you hadn't noticed, Keynesian economics has been disproven many times over. If I were you, I would start paying attention to those of the Austrian school, who predicted, clearly, publicly, and well in advance -- you can find old videos of Peter Schiff and Ron Paul on YouTube if you need convincing -- just exactly the economic situation we have seen this last year or two. In fact, there is a very good compilation, called "Peter Schiff Was Right", showing clips from TV shows a few years ago in which Peter Schiff disagrees with the "experts" on the economy. They even laughed at him. But as it turned out he was exactly right, and the others were dead wrong. This is no coincidence: he (and Paul, and others of the Austrian school) explained not only what was going to happen but also why. It's all right there for everybody to see.
How much is "Peter Schiff Was Right" related to the prophesies of Nostradamus? He predicted the market crash, etc years ago, but the longer you stretch out your claims, the more likely they are to be "proven correct"...especially if they are vague to begin with (were his claims vague?). I can claim now that the "recovery" we are in is not real and that the market is due for another crash and be proven right eventually...might take another 20 years though. I also "predicted" the market crash back in 2006/2007, but didn't have any particular media outlet or personal conviction for it to be noted. I'm thinking he was the contrarian naysayer that popped up at just the right time to be proven correct...I'm sure you can find his analogue from the early 90's, except nobody remembers him because he was not "proven correct".