Behind every HFT algorithm there is a person, but it’s more fun to think they have their own soul

March 10, 2012

The Financial Times Magazine recently had an interesting piece about an academic lab that has become a breeding ground for algos used in high frequency trading — University College London’s Financial Computing Centre. Sam Knight, the author of the article, provides an interesting portrait of the personal biographies of the postdocs and faculty involved in this fascinating project. 

 

The Financial Computing Centre at UCL, a collaboration with the London School of Economics, the London Business School and 20 leading financial institutions, claims to be the only institute of its kind in Europe. Each year since its establishment in late 2008, between 600 and 800 students have applied for its 12 fully funded PhD places, which each cost the taxpayer £30,000 per year. Dozens more applicants come from the financial industry, where employers are willing to subsidise up to five years of research at the tantalising intersection of computers, data and money.

 

But as a sociologist that has been looking into financial algorithms for the past three years, I cannot but help notice that Mr. Knight has fallen prey to the same mistake as academic economists. In trying to convey the full novelty of algorithms, these are presented as a technology that is entirely autonomous from human traders. And that, Frankenstein-like, they might turn against their creators at any time.

In fact, the reality is much different. These algos are constantly monitored by the traders, who tweak their parameters to fit the market context. My point is, high frequency trading has a key social dimension that is forgotten in the article — and in much academic economics. Overlooking this dimension makes algos look more threatening than they actually are, and gives the mistaken impression that the only skill necessary to master them is familiarity with computer code. Behind every seemingly autonomous algo there is a person. But of course it’s more interesting to think of algos as living bacteria endowed with their own soul.

11 Responses to “Behind every HFT algorithm there is a person, but it’s more fun to think they have their own soul”

  1. markcuban Says:

    you are wrong. Algorithms can be misprogramed. They can be misconceived. As part of an equation, you are right. But when those algorithms control millions of shares of stock, that is a possible recipe for disaster.

    When algorithms have to interact with each other, the owner controls only their own and acts like they are in a vacuum.

    a problem with one can lead to unexpected results with the other.

    its nice to say that algorithms are people too, but that is not the case

  2. danielbeunza Says:

    I would say you are incurring in the symmetrical error that you denounce. The key in understanding HFT is avoiding the extreme views that reduce this activity to either humans or machines. By cautioning that I am reducing them to humans (which I’m not, I’m just reminding people that humans are still there), you actually reduce them to machines.

    How then to retain a symmetrical view? To do this, I’d argue we need to look at the combined “assembly” of humans and machines. (This has been the key focus of French sociology of innovation for some time.) And focus in things like: what is the interface used by HFT traders, and how much can they see? How to build slowness into the system at key points in time so that humans can provide judgment? How can shame, embarrassment and norms of good behavior be brought back?

    • RA Eckart Says:

      Cuban’s argument stated another way is that humans are fallible and capable of fallible programs. Cuban’s point-of-view is unique because it’s inside the system dealing with algorithms as a participant.

      Your questions are interesting, but a participant sees machines outpacing humans and human supervision daily. Slowing a machine down is antithetical. I trade too, and the capital behind HFTs is a lot for “shame, embarassment and norms of good behavior” to overcome.


  3. […] Behind every high frequency trading algorithm there is a person.  (socializing finance) […]


  4. […] otherwise interesting blog post about people and algorithms at ‘socializing finance’ was made more so when I noticed […]


  5. […] Mark Cuban-Daniel Beunza debate from earlier this week deserves further comment. Beunza argued that “behind every seemingly autonomous algo[rithm] there […]

  6. danielbeunza Says:

    @Eckart: your point is interesting and surprising to me. What I meant to argue is that the humans are behind the algo. This is what an HFT fund manager explained to me.

    “We have IT people and we have traders. But a trader or not really — traditional traders have a judgment of what is cheap or what is expensive. They are there to tweak the settings because what this business is about is being able to give optimal pricing. All of us and all of our competitors are competing with each other by trying to have superior pricing than their competitors. And in order to come up with that pricing you need [inputs]. And the inputs, that is the secret sauce.”

    Is that how it works? And if not, how do you do it?

  7. Leonard Says:

    An interesting effect about emphasizing the humans behind HFTs is that people stop glorifying it. HFT and algo-trading became a positivist myth. There is no mythical secret and no sauce. In reality it is just trend following and arbitrage by speed. Simple stuff. but difficult to implement.The perception is a social dimension.
    Why do people still need to make up a cult ? (…like the catholic church?)

    But please, no actor-network theory. That is misleading too.😉

  8. danielbeunza Says:

    Leonard, I agree with your point about the implementation, which fits with one conversation I had with the biggest HFT player I’ve talked to (“we can connect to an exchange in two days”). But the problem lies in developing a general way to talk about it. What makes for a good implementation, in general?


  9. […] few weeks ago I was surprised to find Cuban the author of an informed comment left at a sociology blog I frequent — socfinance — a  blog I quite like but would not think to […]


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