Wednesday, July 29, 2009

AI on Wall Street

A recent article in the New York Times describes "high-frequency trading," a new system for trading stocks that depends on high-powered computers that "execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds."

According to the article, only a handful of traders currently have access to these tools, giving them an edge in electronic trading. They are able to spot trends and act on them so quickly and in such large scale that it's possible for a trader (that is, and AI trader) to buy in-demand shares and almost immediately sell them to slower traders at a profit.

This use of artificial intelligence is not as glamorous as warrior robots, but it may have the potential to change the behavior of markets, not to mention create an uneven playing field based on access to this technology. The immediate changes are obviously welcomed by the traders who can indulge in high-frequency trading, but what are the ramifications down the road?

Thanks to Colin Allen (a member of the PAIT Planning Committee) for bringing this article to my attention.

Ken Pimple, PAIT project director.

1 comment:

Don Searing, PhD, Syncere Systems said...

There is an interesting article in Forbes on this phenomenon and its history, as well as the efforts others are putting forth to combat the trend (e.g., dark pools) or to even the playing field by deploying similar functionality.

Forbes: The New Masters of Wall Street

It is interesting to think of the arbitragers themselves not just arbitraging the differences in prices between markets, but really as arbitragers of the technological differences between different trading houses. When the technology is deployed across the entire field, the advantage of these tools will dissipate.