[ExI] Efficiency of algorithmic trading

[Rafal Smigrodzki]

On Fri, Apr 29, 2011 at 6:52 AM, Eugen Leitl <eugen at leitl.org> wrote:
> On Fri, Apr 29, 2011 at 06:10:38AM -0400, Rafal Smigrodzki wrote:
>
>> ### Well, why should the clueless expect to gain? Inefficient actions
>
> There's a considerable incitement to bet large fractions of your
> retirement fund into stocks, at least in USia (Roth IRA etc.).

### That actually prevents you from being a small investor, since you
are using institutional intermediaries - and if they are using
algorithmic trading on your behalf, you gain as well. Long-term stock
investment as retirement savings is not a problem, it's the solution.

---------

> Inversely, in Europe we have a pension model which is equally a Ponzi
> scheme, based on particular expectations in economic growth,
> wealth distribution and demography. Both models are broken.

### The broken parts of the US system are the involvement of the state
in Social Security (which is the opposite of investing, it's fleecing
workers to allow immediate consumption by parasites and bureaucrats,
indeed a Ponzi scheme like the ones in Europe), and the money
counterfeiting actions of the Fed (which have a negative effect on the
stability of stocks, bonds and currency).

--------------------
>
>> am all with you in the decentralization camp but I haven't heard any
>> interesting specifics from you yet. The fraud is mostly related to
>
> It's basically just Tim May's vision, slightly souped up for
> today's end user cloud (freedom-box-like systems). The idea is
> to move critical parts of finance (like the monetary system, mint,
> individual transactions, and higher level functions based on above
> primitives. Reputation tracking, notarization, uncensorable permanent
> public record, and such.

### I am all with you there. But where do you see the problem with
algorithmic trading? Wouldn't algorithmic trading be still possible
(and of course, useful) in distributed financial system independent of
large counterfeiters?

---------------------------
>
>> government involvement in banking, otherwise it tends to be a
>
> You need to shield the system from manipulation on part of end
> users or user groups. Of course cryptography is no panacea (and
> would require diversity to avoid becoming a pivotal point of failure)
> but then it's not hard to improve on the track record of federal
> and corporate crooks.

### Again, full agreement.

--------------------------
>
>> self-sanitizing business (just like other branches of the economy
>> where reputation is key, and performance is easily measurable by
>> outsiders).
>
> One of the key functions if providing an unfalsifyable, publically
> inspectable track record of interactions, so that nym reputation
> for the particular scope can be obtained in realtime.
>
> Yes, most of the above are extremely hard problems. The smart
> people who still think Wall Street quant is a glorious occupation
> should get on that track instead.

### Wall Street (i.e. the system of large government-regulated banks
and businesses) is a centralized government creation, and I fully
agree with you that devising technologies that could allow distributed
short-feedback money management would a boon for humanity. One of the
reasons why governments succeeded in taking control of the monetary
system (aside from simple brute force) was the sheer difficulty in
establishing verifiable information flows about solvency of various
intermediaries and creditors in the pre-electronic era. An FDIC, for
example, initially provided some short term benefits by imposing a
floor on the quality of banks (in the long term it contributed to a
hollowing-out of the system by inducing a false sense of security in
users). It's possible that the acceleration in information flow
possible with modern communication tools could allow the existence of
a self-policed private banking system (and mean really private, not
like Goldman-Sachs, Chase or other government regulated banks) with
low latency of response to solvency changes.

Rafal