Friday, December 2, 2011

Interview with Dave Cliff

Dave Cliff of the University of Bristol is someone whose work I've been meaning to look at much more closely for a long time. Essentially he's an artificial intelligence expert, but has has devoted some of his work to developing trading algorithms. He suggests that many of these algorithms, even one working on extremely simple rules, consistently outperform human beings, which rather undermines the common economic view that people are highly sophisticated rational agents.

I just noticed tht Moneyscience is beginning a several part interview with Cliff, the first part having just appeared. I'm looking forward to the rest. Some highlights from Part I, beginning with Cliff's early work, mid 1990s, on writing algorithms for trading:
I wrote this piece of software called ZIP, Zero Intelligence Plus. The intention was for it to be as minimal as possible, so it is a ridiculously simple algorithm, almost embarrassingly so. It’s essentially some nested if-then rules, the kind of thing that you might type into an Excel spreadsheet macro. And this set of decisions determines whether the trader should increase or decrease a margin. For each unit it trades, has some notion of the price below which it shouldn’t sell or above which it shouldn’t buy and that is its limit price. However, the price that it actually quotes into the market as a bid or an offer is different from the limit price because obviously, if you’ve been told you can buy something and spend no more than ten quid, you want to start low and you might be bidding just one or two pounds. Then gradually, you’ll approach towards the ten quid point in order to get the deal, so with each quote you’re reducing the margin on the trade.  The key innovation I introduced in my ZIP algorithm was that it learned from its experience. So if it made a mistake, it would recognize that mistake and be better the next time it was in the same situation.

HFTR: When was this exactly?

DC: I did the research in 1996 and HP published the results, and the ZIP program code, in 1997. I then went on to do some other things, like DJ-ing and producing algorithmic dance music (but that’s another story!)

Fast-forward to 2001, when I started to get a bunch of calls because a team at IBM’s Research Labs in the US had just completed the first ever systematic experimental tests of human traders competing against automated, adaptive trading systems. Although IBM had developed their own algorithm called MGD, (Modified Gjerstad Dickhaut), it did the same kind of thing as my ZIP algorithm, using different methods. They had tested out both their MGD and my ZIP against human traders under rigorous experimental conditions and found that both algorithms consistently beat humans, regardless of whether the humans or robots were buyers or sellers. The robots always out-performed the humans.

IBM published their findings at the 2001 IJCAI conference (the International Joint Conference on AI) and although IBM are a pretty conservative company, in the opening paragraphs of this paper they said that this was a result that could have financial implications measured in billions of dollars. I think that implicitly what they were saying was there will always be financial markets and there will always be the institutions (i.e. hedge funds, pension management funds, banks, etc). But the traders that do the business on behalf of those institutions would cease to be human at some point in the future and start to be machines. 
Personally, I think there are two important things here. One is that, yes, trading will probably soon become almost all algorithmic. This may tend to make you think the markets will become more mechanical, their collective behaviour emerging out of the very simple actions of so many crude programs.

But the second thing is what this tells us about people -- that traders and investors and people in general aren't so clever or rational, and most of them have probably been following fairly simple rules all along, rules that machines can easily beat. So there's really no reason to think the markets should become more mechanical as they become more algorithmic. They've probably been quite mechanical all along, and algorithmic too -- it's just that non-rational zero intelligence automatons running the algorithms were called people. 

15 comments:

  1. I am wondering how I might be notified whenever a new post has been made. I have subscribed to your RSS which may do the trick? Have a great day!
    Atkinson

    ReplyDelete
  2. I read this article and this interview give us good info about universities thanks for share it online paraphrasing tool .

    ReplyDelete
  3. It's better to take advice from the advisory firm to avoid the risk in trading and Epic Research is a best leading advisory firm in India.












    ReplyDelete

  4. Hello! ffekfbg interesting ffekfbg site! I'm really like it! Very, very ffekfbg good! Penjual QnC Jelly Gamat Daerah Sleman

    ReplyDelete
  5. Do I want to tell everyone about the website today that if you want to get information about history and business, please visit this website visit/ : http://www.gayansagar.com/the-early-bihar

    ReplyDelete
  6. نمتلك مجموعة فروع خاصة بنقل العفش في كلا من الرياض والدمام والخبر والقطيف والجبيل والاحساء والظهران مثل
    شركة نقل اثاث بالدمام
    شركة نقل اثاث بالخبر
    وتقوم شركات نقل الاثاث في الاحساء والقطيف بنقل الاثاث من مكان الى مكان آخر باحترافية عالية وضمانات سلامة الوصول
    شركة نقل عفش بالاحساء
    شركة نقل عفش بالقطيف
    وتجد افضل الخدمات في الظهران والجبيل تقدم عن طريق عمالة مدربة ومؤهلة لنقل وتغليف وتركيب الاثاث بدون خسائر
    شركة نقل عفش بالظهران
    شركة نقل عفش بالجبيل

    ReplyDelete
  7. thanks for this useful piece of article
    v2Web is best digital marketing agency in New York leading in 360 degree suite of services like Web IT Infrastructure, Cloud Based Application, Mobile App Development, Digital Marketing Solution, Virtual Employee, & ICT Solution as your trusted digital solutions provider

    ReplyDelete
  8. Video games are very popular no matter what age that you are. Online video gaming sites are also becoming more in demand as the demand grows for gaming online. Mindcraft games are fun to play and engage the mind. You can find fun and good games here. Some examples of this would be 3D Swat, 2 D Knockout and 1942: Battles in the Sky. These games are just a small example of what is available on this particular site. With 36 categories available, there is something for everyone. top discord servers

    ReplyDelete
  9. Self Storage Dubai
    Assuming you are on the chase after a top financial plan storage space in Dubai that wont beg to be spent , we Self Storage Dubai gathered together the least expensive storage spaces in every city in Dubai.

    It is UAE based quickest moving supplies company ( 2 hours conveyance ) moving boxes , freight boxes , air pockets wrap , tape and so forth .

    One of the expert pressing trucking organizations in Dubai. Proficient staff for house moving , office moving , prepared vehicles and constant help in UAE

    ReplyDelete
  10. Take time now to plan for your business. Becoming a small business owner is a lot like falling in love. Once you fall madly in love with a seemingly fantastic person, it's more difficult to recognize your areas of incompatibility. Similarly, once you have a seemingly fantastic business idea that you're passionate about, it's more difficult to see the potential pitfalls to your success. Plan with a clear head, and a focus on how you can serve others. account bookkeeping

    ReplyDelete
  11. thank you for posting amazing blogs ,its helpful for us

    ReplyDelete
  12. thank you for sharing helpful content with us.
    Branded Laptops on Rent

    ReplyDelete