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.