"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Saturday, February 11, 2012

HFT Computers Go To Realm That Is Beyond Human Limits, Scouring The Sub-Second Regions For Our Weaknesses

Psychology is one of the most important factors in financial markets.  Psychology sets prices, enables aggressive discoveries of accurate prices, and we are all susceptible to it.  In college, many of us learned non-sense models, we learned how everyone does everything (bringing no real ingenuity to the market except for a handful of intelligent human beings).  Instead of focusing on P/E's and tax havens, what if you price a firm just based on perception?  Some the high-end HFT models are able to do just this.  These programs have a code line that clearly defines the human limitations.  We can only react so fast.  The signals in our brain travel at light speed and when the information flow is large enough, these signals can be slowed as we process and store and decipher what is happening.  Co-located machines can be enlarged and improved upon so as to enable the fast processing, storing, and deciphering of information.  Simply put, we can't beat HFT at their own game and this form a trading risks creating fractures within financial markets that when ignored (Normalcy Bias) will cause severe breakdowns in pricing and capital formation as trust vanishes and participants go elsewhere to compete.

A white page was recently released in which The University of Miami physics department, Nanex LLC, MITRE Corp, and University of Vermont Complex Systems Center, collaborated and attempted to explain how these systems work at "sub-second levels where human become unable to respond or intervene sufficiently quickly"Neil Johnson (UoM) and Eric Hunsader (NANEX) have  trawled through the data and found that fractures are remarkably common – 18,520 took place between 2006 and 2010. 

Here is one of the many thousands of examples where prices can double and retract within 500 milliseconds (faster than the best chess player can realize they are in checkmate, or better put, faster than the most alert human can interpret, process, and respond to risk).  We also just recently witnessed a stock trade from $3 to $200,000 and back, which highlights the serious deviations being introduced from low-latency, co-located systems.

Quick side note: if you want to trade around this, consider using The Accumulator and HFTAlert and HFTAlert Pro.  CC uses all three and stands by the effective ability of each platform to protect your trading and to insure you have clear view of the market, outside of any garbage noise.

CNTY On June 21, 2011 trades from $3.00 to $8.00 (original image from NANEX)

The implications of this new form of trading are obvious, but one sticks out particularly, who will/can interfere with a system that acts quicker than human beings can fathom?  If things go haywire (we say if but it happens everyday with proof from Nanex, HFT Alert, Themis and Calibrated Confidence released real-time through Twitter) the machines will have caused plentiful damage due to the inability of humans to process, store and decipher information at a comparable level or speed.  The image in your head should be one of futuristic life where the machines run us and we become slaves to our own advances.

Below is the paper that is the culmination of hard work and fact based analysis.  Chew on this while the UK Treasurer tells you that HFT has no direct effect on prices.
Financial Black Swans Driven by Ultrafast Machine Ecology