They’re here. Oh dear. Conventional wisdom is based on conventional thought from conventional situations. Check your calendar. It is now 2015. Old conventions based on the reactions of pesky humans don’t necessarily apply to a world where computers are making the decisions, and acting accordingly. That doesn’t mean stop. It does mean think. Things are different now. Some of the old advice remains true. Much of the old advice is just old. Bots are trading in more than just stocks. The markets’ defenses are designed for humans; and may never quite catch the evolution of technology. These will be, and are, interesting times when new wisdom will be required.
Read enough news and trends appear. We humans are good at discerning patterns, even when there aren’t any; but various bits of news from the last few months are possible signs of how different things are.
Bots Buy Houses
I wrote about this here a few weeks ago. The real estate market is no longer controlled by humans. Computer programs have stepped beyond their advisory roles and are actually placing offers on houses. Humans are required to inspect, verify, and close; but the inclusion of computer generated offers means buyers are competing against machines.
Bots Beat Wall Street From Tweets
This item was added to the news feed of Pretending Not To Panic (#PNTP), another blog I run. Computer programs are reading Twitter. Even if you aren’t, programs are reading the tweets, watching for news about companies and stocks, and trading options before humans can act. If you thought it programmed trading was pervasive before, it just stepped out into social media for something more significant than ads or spam.
Another PNTP post brought up the ethical and cautionary issue of developing advanced artificial intelligence (AI). Many tech pioneers have raised concerns about developing AI to the extent that we can’t control it; at least not until we understand it. Mega-geeks are worried and want to make sure any AI is developed in ways we like. Want to see their worries in a more graphic display? Watch the Matrix. It isn’t an exact display, but it gets across the idea.
As a individual investor, I try to keep my life simple. That’s why the title of my book is Dream. Invest. Live. Investing is only one-third of the title. Dream and Live are the beginning and the end. Investing is merely one way to tie them together. Most investment strategies were developed when people met people to make transactions. Technology has become more useful and was therefore incorporated. Technology made it easier to buy homes by cruising the web instead of cruising the streets, at least until the short list is created. Technology helped enable NASDAQ and discount brokers, which allowed millions of individual investors to take control of their portfolios at lower cost – with an ongoing debate about changes in risk.
I’ve been buying and selling stocks from about 1978, from when the New York Stock Exchange actually remembered exchanging shares of stock. The first programmed trading induced crash that I recall was in 1987. The market recovered. Protections were put in place. Everything will be fine, right? Skip forward 23 years and witness the flash crash of 2010. Evidently, we’re not as protected as we think.
This week the SEC finally uncovered the cause
of the flash crash. Allegedly, one trader placed a long string of illegal sell orders, hoping to drive the market down, then making money by buying back in as it recovered. Five years later he was found. There’s good reason to believe that he did it more than once, because why stop something that is working. There’s also the crash in DNDN, an individual stock that experienced the same phenomenon, but without the subsequent investigation. Small companies don’t get the same attention as the entire market.
The market’s flash crash was caused by a human, but couldn’t happen without computer executed orders. Imagine then, someone who wants to make a lot of money, using the same technique, and designing the software to stop just shy of being noticed. Money is a sufficient motivation. The technology and ineffective regulation creates the opportunity. Hire the right programmers, buy the right hardware, and attain the ability. I would be surprised if this isn’t already happening.
Take the undercover AI scenario, add someone’s desire to accumulate wealth at all costs, and it is easy to imagine a well-funded development effort that would unleash an evolutionary leap in computerized trading in stocks and any other connected market. Whether they worry about designing in controls or limits or not, I don’t see anything that will stop them. So, rather than ponder the debate about whether they’ll exist, I think the new conventional wisdom is to assume they do.
I collect science fiction. Because of my recent troubles, I had to sell about half of my collection. One book was in the collection because it coined the term computer ‘worm’; Shockwave Rider by John Brunner. It was an early hacker novel from before hacker was a term. The main character used his skills to hack the network, as we expect hackers to do; but, he was smart enough to never leave a trace. His kind of hack is much more worrisome. Hacks that are so subtle, even when pervasive, that they can’t be found because no one has any reason to suspect the need for a search. In that scenario, there’s no way to tell if such a subversion exists.
This can sound doom and gloom, with tones of conspiracy theories, and apocalyptic overtones; but my take is simpler. Much of the activity is short term. Therefore, invest for the long term. Know that sudden aberrations will happen, because they have; and that they won’t be corrected, because only a few have. And, know that each bit of conventional wisdom is worth studying to understand its implicit assumptions because assuming is the most dangerous action of all.