Risk Rap

Rapping About a World at Risk

Tyranny of the Algo’s

These are the days when the earth stands still. The world is enthralled in paralysis over the capital market carnage and the mayhem its creating with our 401Ks, IRAs, bank solvency, corporate viability and government stability. Our life styles and future security is in double jeopardy. We feel a collective sense of economic debasement and existential dread brought upon us by unseen dematerialized security exchanges that seem intent on assaulting our humanity.

The markets have been taken over by machines. Black box robots digitally blip out buy and sell orders moving massive amounts of capital in and out of securities markets. Without emotion they are governed only by an extreme prejudice for the quantitative parameters of its algorithmic soul. The Algo’s create a risk free rate of return and a devastating toll of moral hazards that extend to all corners of the globe.

During the past few decades financial engineering has been a growing discipline within the capital market industry. Traders began to employ the use of sophisticated technologies and statistical analysis to determine how investment portfolios should be constructed and what securities and asset classes should trade to optimize performance and investment returns.

In the 1970’s Barr Rosenberg then a professor at Berkley created one of the first quantitative management tools to create, manage and trade investment portfolios. Since that time quantitative investment management has grown into an expansive science and in many respects has supplanted traditional fundamental investment analysis as the preferred methodology to manage securities and engage in capital market activities.

Algorithmic (Algo) trading is a quantitative driven investment and trading strategy that utilizes statistical analysis of markets, securities and performance attribution factors to trade and rebalance investment portfolio’s based on indicators and signals emanating from real time trading markets. Algo trading systems read the real time data streams from the capital markets and simultaneously kick off massive buy and sell orders to create investment positions that correlate to their algorithmic investment strategy.

The volatile markets are driving Algo trading platforms crazy. Yesterday volume on the NYSE were well into the billions and though we are thankful for the liquidity stat arb trading provides the Algo’s are ruling the markets by taking their commands from the volatility King VIXX and its valuation Viceroy, VWAP. Algo’s are trading the markets all day creating and taking advantage of the ebbs and flows of market valuation. But it is in the final hour of an exchanges trading day when the Algo’s like persnickety day traders close their positions in an orgy of short selling and position liquidation. For the past seven day’s these sell offs have shaved trillions of dollars in market capitalization and have seriously depleted the net wealth of millions of ordinary shareholders who believed enough in the promise of capitalism to invest hard earned life savings which are quickly being wiped out. Algo’s don’t know what terrors lurk in the minds of central bankers and regulators and are content to reload their bazookas at the beginning of each day’s trading. So they close their positions in one country and pass the book to confederate traders in other time zones to trade markets in other country’s content to spread the virus like a capital market avian flu pandemic.

The Algo’s are fully in control. They are shooting off buy and sell orders faster then a digital blip on the CBOE ticker can record. We are at the mercy of these black box leviathans that knows no allegiance to country, man or God. These black box market masters are trying to enslave us all by forcing us to pay tribute to the DE Shaws and SAC Capital Managements of the world. Are we trapped inside a diabolical matrix?

Welcome to the machine.

Music Video: Pink Floyd, Welcome to the Machine

Risk: humanity, moral hazard, distribution of wealth, market volatility

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October 10, 2008 - Posted by | hedge funds, rock | , , , , , , , , ,

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