- “Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed,” writes the New York Times’ Charles Duhigg in a front page piece that’s been the talk of the town in New York and Washington. “High-frequency trading is one answer.” Duhigg writes, “High-frequency trading systems are so fast they can outsmart or outrun other investors, humans and computers alike.”
- The term “high-frequency” refers to fast entry and exit of trading positions, the process best executed by algorithms and dedicated computer programs employing artificial intelligence. However, this can turn into the intentional probing of the market with tiny orders that are immediately canceled at speeds that cannot be matched by individual human investors.
- While this isn’t quite the “intelligence explosion” of machines foreseen by I.J. Good in 1965 and dubbed “the Singularity” by Vernor Vinge in 1993, the speed and sophistication of Goldman Sachs computer algorithms are indeed leaving humans –- at least, individual investors –- in the dust.
- Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public,” writes Schumer. This allows “those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity.”
- Regardless of the debate over how HFT is used in market trading, it’s clear that supercomputers can already “outrun and outsmart” individual investors. This isn’t quite the Singularity envisioned by Good and Vinge, but it raises some perplexing questions about the use of artificial intelligence to gain market advantage when individual humans “with slide rules” cannot compete.
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