Shawn Gourley and Bob Goodson started a company called Quid which would “apply new algorithms, unconventional data sources, and novel visualizations to create a global intelligence platform“.  Bob was the first employee of Yelp and  and was a student with Sean at Oxford.  After leaving Oxford, Sean grabbed a PH.D in Physics which naturally lead him to the “New Wall Street”, where physics reign supreme through their ability to use atoms like neutrinos to execute profitable trading strategies.

TEDx has created an event focused on the New Wall Street with 16 speakers, one of which was Sean who discussed the speed of human strategic thinking and out fundamental limitation regarding our biological hardware.  The talk embedded below will cover the current high-frequency ecosystem that is dominated by an algorithmic species that came about through intelligent design and possess free will, as the human creators are no longer fully in control.

We know of algorithms that will evolve and rebuild themselves.  They test new strategies and if specific profit metrics are met and the strategy stays within the designated risk boundaries, an algo made last year could be completely unrecognizable today. 

Since the flash crash is the central focus of almost all HFT discussions, we at Floating Path advise our readers to familiarize themselves with the raw data as broken down by Nanex:

6 months ago, almost to the day, I highlighted a white paper that used empirical evidence to describe the dynamics of frequenct black swan events with ultra-fast durations (<650 milliseconds for crashes, <950 milliseconds for spikes).  In the paper the authors discussed the limitations of human reaction time by using a human chess player’s ability to recognize that he is in checkmate, which turns out to be roughly 500 milliseconds.  With that post and the white paper that accompanies (which I strongly suggest you read) it in mind, this video strikes to the core of how today’s markets are “perceiving” price based on differing amounts and quality of information. 

The speaker will use an example where a stock price runs round trip in 4 seconds, a period of time which he notes is required for a human to read a Tweet or a headline.  RIMM had a great example of how the price moved before the news even got to the traders platforms.

I agree with Sean when he claims “it is not our world anymore, it’s the world of the machines”.

Truly a fascinating video discussing algo strategies and how the world of nanoseconds really works. Be sure to select HD 720p.

(h/t @BadAlgo)

If this topic is of interest to you and you are concerned about how the New Wall Street works I suggest you read Broken Markets by Joe Saluzzi and Sal Arnuk of Themis Trading.  They worked at Instinet and have seen how computers have altered the landscape of Wall Street in great detail and with expert precision.

 

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