The future ecology of stock traders

I am beyond fascinated by the interactions between competing intelligences that exist in the stock market. It is a bizarre mishmash of humans, AIs, and both (cyborgpeople?).

One recent strategy that exploits this interaction is ‘spoofing‘. The description from the link:

  • You place an order to sell a million widgets at $104.
  • You immediately place an order to buy 10 widgets at $101.
  • Everyone sees the million-widget order and is like, “Wow, lotta supply, the market is going down, better dump my widgets!”
  • So someone is happy to sell you 10 widgets for $101 each.
  • Then you immediately cancel your million-widget order, leaving you with 10 widgets for which you paid $1,010.
  • Then you place an order to buy a million widgets for $101, and another order to sell 10 widgets at $104.
  • Everyone sees the new million-widget order, and since no one has any attention span at all, they are like, “Wow, lotta demand, the market is going up, better buy some widgets!”
  • So someone is happy to buy 10 widgets from you for $104 each.
  • Then you immediately cancel your million-widget order, leaving you with no widgets, no orders and $30 in sweet sweet profits.

Amusingly enough, you don’t even need a fancy computer program for it – you can just hire a bunch of people who are really good at fast video games and they can click click click those keys fast enough for you.

Now some day trader living in his parent’s basement is accused of using this technique and causing the flash crash of 2010 (it possibly wasn’t him directly, but he could have caused some cascade that led to it).

I’m sitting here with popcorn, waiting to see how the ecosystem of varied intelligences evolves in competition with each other. Sounds like Wall Street needs to take some crash courses in ecology.

The Journal of Invited Dissent

“Why aren’t there comments on academic articles?” someone asked me over coffee (yes, I have exciting coffee conversations). “People should point out how silly a lot of this stuff is.”

I shrugged. “Politics,” I said. “Look at the head of any lab: they’ll rip apart a paper in their lab meetings, and then won’t say much in public. They need to keep a congenial public face because those other scientists will be reviewing their papers.”

The truth is there are comment sections on a lot of scientific articles, they are just barely used, or are used poorly (random rants, irrelevant commentary, etc.)

My companion suggested that what we really need is a journal offering critical commentary on other articles: and not just the bad, but the good as well. What does this really say? What is interesting or uninteresting?

This is the Journal of Invited Dissent. Would it work? Probably not: there is too much incentive to keep the veneer of bland congeniality in public. But there is an example of what it might look like (it was not what spurred the conversation above, but it is telling that the problem repeatedly pops up).

Bjorn Brembs has taken exception to an article published in Nature Neuroscience last year. He found the article to be overhyped and under-referenced (though still interesting and useful!). Although he wrote a letter to the editor at NN, they basically shrugged with comments such as “I agree that the article’s tone is a little more breathless than strictly required, but this is the style presently in vogue”.

So he posted the letter to the comments section at PubMed! Something you probably did not even know existed, and are likely to ignore even if you do know of it. And even better, the senior author on the paper publicly responded in the comments!

And these comments illustrate exactly why they are needed: they provide much-needed context outside of the ‘hype’ needed to publish in a high-profile journal. They shine light on the scientific crevices that those few of you who are not experts in motor learning might otherwise pass by.

Whither experimental economics?

When I was applying to graduate school, I looked at three options: neuroscience, computer science, and economics. I had, effectively, done an economics major as an undergrad and had worked at an economic consulting firm. But the lack of controlled experimentation in economics kept me from applying and I ended up as a neuroscientist. (There is, of course, a very experimental non-human economics which goes by the name of ecology, though I did not recognize it at the time.)

I profess to being confused as to the lack of experimentation in economics, especially for a field that constantly tries to defend its status as a science. (Well, I understand: incentives, existing capabilities, and all that.)

A recent dissertation on the history of experimental economics – as opposed to behavioral economics – is enlightening:

“We were describing this mechanism and Vernon says, “You know, I can test this whether it works or not.“ I said, “What do you mean?“ And he says, “I’ll run an experiment.“ I said, “What the heck are you talking about? What do you do?“ And so he hauls seven or eight graduate students into a classroom. He ran the mechanism and it didn’t work. It didn’t converge to the equilibrium. It didn’t produce the outcomes the theory said it would produce. And I thought, okay. So back to [doing] theory. I don’t care; this doesn’t bother me.

It bothered Vernon a lot because we sat around that evening talking and he says, “Oh, I know what I did wrong.“ And he went back the next day and he hauled the students back in the room, changed the rules just a little bit in ways that the theory wouldn’t notice the difference. From our theory point of view, it wouldn’t have mattered. But he changed the rules a little bit and bang that thing zapped in and converged.“

The difference between the two experiments was the information shared with the test subjects. The first time around, the subjects wrote down their number on a piece of paper and then Smith wrote them up on the board. Then he asked the subjects to send another message and if the messages were the same twice in a row he would stop, since that stability would be interpreted as having reached equilibrium. But the messages did not stop the first time Smith had run the experiment a day earlier…

The fact that the experiment did not converge at the first attempt, but did at the second with a change of only one rule (the information structure available to the participants) not required by theory to make its prediction made a lasting impact on Ledyard.

And this is exactly why we do experiments:

[T]he theory didn’t distinguish between those two rules, but Vernon knew how to find a rule that would lead to an equilibrium. It meant he knew something that I didn’t know and he had a way of demonstrating it that was really neat.

In psychology and neuroscience, there are many laboratories doing animal experiments testing some sort of economic decision-making hypothesis, though it is debatable how much of that work has filtered into the economic profession. What the two fields could really use, though, are economic ideas about more than just basic decision-making. Much of economics is about markets and mass decisions; there is very animal experimentation of these questions.

(via Marginal Revolution)

Richard Lewontin: some perspectives on the sociology of ecology

There’s an interesting interview with Richard Lewontin over at the Evolution Institute.

First, he slags off Steven J Gould a bit:

RL: Now I should warn you about my prejudices. Steve and I taught evolution together for years and in a sense we struggled in class constantly because Steve, in my view, was preoccupied with the desire to be considered a very original and great evolutionary theorist. So he would exaggerate and even caricature certain features, which are true but not the way you want to present them. For example, punctuated equilibrium, one of his favorites. He would go to the blackboard and show a trait rising gradually and then becoming completely flat for a while with no change at all, and then rising quickly and then completely flat, etc. which is a kind of caricature of the fact that there is variability in the evolution of traits, sometimes faster and sometimes slower, but which he made into punctuated equilibrium literally. Then I would have to get up in class and say “Don’t take this caricature too seriously. It really looks like this…” and I would make some more gradual variable rates. Steve and I had that kind of struggle constantly. He would fasten on a particular interesting aspect of the evolutionary process and then make it into a kind of rigid, almost vacuous rule, because—now I have to say that this is my view—I have no demonstration of it—that Steve was really preoccupied by becoming a famous evolutionist.

And then his former advisor:

RL: Now, historically one of the most interesting—now I want to talk a little about the sociology of our science—Theodosius Dobzhansky, my professor and then greatest living evolutionary biologist…

DSW: Mr. “Nothing in biology makes sense except in the light of evolution…”

RL: Yeah, right. He was a very bad field observer. Theodosius Dobzhansky never, in his entire life, nor any of his students, me included—I would go out in the field with him, actually–ever saw a Drosophila pseudoobscura in its natural habitat…We didn’t know where they laid their eggs. We couldn’t have counted the number of eggs of different genotypes. How did we study Drosophila in the wild? We went out into the desert, into Death Valley, we moved into a little oasis, we went first to the grocery store, and bought rotten bananas. We mushed up the bananas with yeast till they fermented a bit, we dumped that into the paper containers, put it out in the field and the flies came to us…If I wanted to study evolutionary forces acting on some genetic polymorphism in Drosophila, I would go and look for some species of Drosophila where I could actually look at, perturb, and work with the actual breeding sites and egg laying sites and pick up larvae in nature and so on. And in fact there is such a group of Drosophila. They the cactophilic ones. There is a group [of scientists] from Texas and other places that studies the cactophilic Drosophila in an ecologically sensible way of going to the rot pockets and perturbing them, getting larvae out of them and so on. That group never acquired the prestige associated with the Dobzhansky school because—I don’t know why.

Lewontin is not normally my cup of tea, but this view is very interesting.