Friday, January 21, 2011

Wall Street 2 Money Never Sleeps 2

Has Wall Street gone out of control?  What are dark pools, and how are mathematical models controlling us?

If the singularity approaches, as we think it is, will it always be a welcome thing?  Are we seeing the first results of it already in Wall Street?

Dark Pools
Dark pools are anonymous networks that allow a seller which wishes to sell many shares of a stock to do so with anonymity to an anonymous buyer.  The obvious advantage to this is that the shares do not go down in value as they would in a public exchange due to the large number of shares flooding the market.  Here is a video in which dark pools are explained.  If you cannot see the embedded video here is the link:

Inform Technologies And Mathematical Models of Semantics
This company based in New York City specializes in providing media companies with extensive reports dealing with words found in blogs, web pages, magazines, newspapers, etc.  In a 2006 article of business week entitled, Math Will Rock Your World, Inform Technologies is described.  This article is worth quoting extensively.  The influence of mathematical models that has been used in the science world is now coming to Wall Street.  This world is being more and more ruled by math, not just in its obvious way in calculations and statistics, but in the study and understanding of people.
The world is moving into a new age of numbers. Partnerships between mathematicians and computer scientists are bulling into whole new domains of business and imposing the efficiencies of math. This has happened before. In past decades, the marriage of higher math and computer modeling transformed science and engineering. Quants turned finance upside down a generation ago. And data miners plucked useful nuggets from vast consumer and business databases. But just look at where the mathematicians are now. They're helping to map out advertising campaigns, they're changing the nature of research in newsrooms and in biology labs, and they're enabling marketers to forge new one-on-one relationships with customers. As this occurs, more of the economy falls into the realm of numbers. Says James R. Schatz, chief of the mathematics research group at the National Security Agency: "There has never been a better time to be a mathematician."
According to this article high level mathematicians are becoming a new elite, making six figure salaries just coming out of college.  The last frontier is the study of human behavior  and convert that into a mathematical model.
...companies are piecing together mathematical models of customers and employees. Some models predict what music we'll buy, others figure out which worker is best equipped for a particular job. For now, these models are crude, the digital equivalent of stick figures. But over the coming decade, each of us will give birth to far more fleshed out simulations of ourselves. We'll be modeled as workers, shoppers, voters, and patients. Some of the simulations will have our names and credit cards attached, perhaps a few genetic details. In others, our identities will be shielded. Many of these models will be eerily accurate and others laughably off mark. But companies and governments will use them all the same to predict how to sell us things, steer us clear of diseases, and ramp up our productivity. And yes, they'll try to use them to keep us from hijacking airplanes or detonating bombs.
The article goes on to say how the 21st century will shape our lives in ways which a decade ago most Americans would not have imagined. 
This mathematical modeling of humanity promises to be one of the great undertakings of the 21st century. It will grow in scope to include much of the physical world as mathematicians get their hands on new flows of data, from atmospheric sensors to the feeds from millions of security cameras. It's a parallel world that's taking shape, a laboratory for innovation and discovery composed of numbers, vectors, and algorithms. "We turn the world of content into math, and we turn you into math," says Howard Kaushansky, CEO of Boulder (Colo.)-based Umbria Inc., a company that uses math to analyze marketing trends online.
Privacy will be the first victim of this new endeavor.  Privacy is already a valued illusion.  Anyone involved in technology knows that no one really has privacy.  Anything about anyone can be found out.  Even governments do not have much privacy as wikileaks has shown recently. 
The power of mathematicians to make sense of personal data and to model the behavior of individuals will inevitably continue to erode privacy. Merchants will be in a position to track many of our most intimate purchases, and employers will be able to rank us not only by productivity, but by wasted minutes. What's more, the rise of math can contribute to a sense that individuals are powerless, a foreboding that mathematics, from our credit rating to our genomic map, spells out our destiny.
Inform Technologies is in the middle of this effort.  It sells analysis of keywords and ideas in English media and allows companies like Goldman Sachs to make decisions based on the results to predict where the market will go.

Some of the software being used is produced by companies like QuarterFS which produce software like ActivePivot, ActiveStream, and Apama by Progress Software.  If you cannot see the embedded video here is the link:

Federal Government Reaction to HF Trading
CNBC Poll 9/2010
Since the "Flash Crash" of May 6, 2010, the financial community has awakened in regards to some of the dangers of high frequency trading.  Many thought that the "circuit breaker" approach in which the entire New York Stock Exchange could be closed for 5 minutes or longer in the case of a descending destructive cycle in less than a second would fix things.  But as Sal Amun explains to CNBC it does not.  Watch this video.  If you cannot see the embedded video here is the link:

According to Mr. Arnuk, the descent of Progress Energy happened in 5 milliseconds before the circuit breaker kicked in.  This was enough to decimate the company on the stock exchange.

In the next installment of this series we will answer the question as to whether these software programs can be hacked for nefarious purposes as well as the case of Sergey Aleynikov and what is says about Goldman Sachs software.  Stay tuned.

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