It’s Official: Computerized Trading Agents Do Beat Humans in Foreign Exchange Markets

ScienceDaily (July 27, 2011) — Robot trading agents, which already dominate the foreign exchange markets, have now been definitively shown to beat human traders at the same game.

Results presented at a conference July 22 showed beyond doubt that computerized trading agents, using the Adaptive Aggressiveness (AA) strategy developed at the University of Southampton in 2008, can beat both human traders and robot traders using any other strategy.

The new results were obtained after a re-run of the well-known IBM experiment (2001) where human traders competed against state-of-the-art computerised trading agents -- and lost.

Ten years on, experiments carried out by Marco De Lucas and Professor Dave Cliff of the University of Bristol have shown that AA is now the leading strategy, able to beat both robot traders and humans.

The academics presented their findings at the International Joint Conference on Artificial Intelligence (IJCAI 2011), held in Barcelona.

Dr Krishnan Vytelingum, who designed the AA strategy along with Professor Dave Cliff and Professor Nick Jennings at the University of Southampton in 2008, commented: "Robot traders can analyse far larger datasets than human traders. They crunch the data faster and more efficiently and act on it faster. Robot trading is becoming more and more prominent in financial markets and currently dominates the foreign exchange market with 70 per cent of trade going through robot traders."

Professor Jennings, Head of Agents, Complexity and Interaction research at the University of Southampton, commented: "AA was designed initially to outperform other automated trading strategies so it is very pleasing to see that it also outperforms human traders. We are now working on developing this strategy further."

It’s official: Computerized trading agents do beat humans in foreign exchange markets

This smells a lot like the idea of a Meta within competitive gaming.

Which means once the Meta is understood and well entrenched people will start using strategies designed to exploit and beat the Meta and nothing else.

Only good things can come of this.

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Not sure what you mean by that; but there is no explicit claim that the automatic traders are doing someting qualitatively distinct.

Quote:

Robot traders can analyse far larger datasets than human traders. They crunch the data faster and more efficiently and act on it faster. Robot trading is becoming more and more prominent in financial markets and currently dominates the foreign exchange market with 70 per cent of trade going through robot traders.

Hmmm... So at what point does this "market" cease being a tool for human value creation and analysis and simply becomes background noise?

Automated tools are useful no question, however if the overall market dynamic begins to be controlled by those tools we are no better off than before. In fact we could be worse off because we will need new tools to analyze and respond to the new tools that analyze and respond... rinse and repeat.

F

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But automated trading also produces avoidable crashes, dunnit? Like the flash-crash in May last year. True you could say that could have been avoided if the central clearing house systems had been better adapted to deal with the effects of computerised trading, but last I heard the EU was trying to impose that and not achieving much success.

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Yes, but the more interesting point is that as Fred suggests, this may all turn into background noise, no more significant than a vending machine. The way they are being used now is currently problematic, but all those problems could be obviated by a fully automated system. Something analogous to the way that mass production and fixed prices eliminated haggling in markets, it will just cease to be a function that needs to be performed. Theoretically all the trading houses could just be shut down and replaced by an automated system, at which point the very existence of stock market speculation as we know it gets called into question.

Unless you can stop people having different opinions on the future value of things, you cannot eliminate speculation per se.

Automated systems are used and useful for a specific set of strategies. It might be they are the biggest players in term of volumes and it might be they are better at those specific strategies than humans (pretty obvious, to be honest) but they are not going to eliminate all the other style of investment/trading.

So machines are best when:

1- You're trying to execute big orders without moving the markets. They're called Transaction Cost Reduction strategies and use VWAP ( VWAP - Wikipedia, the free encyclopedia ) as a benchmark, most often.

2- You're implementing a specific arbitrage strategy (market neutral pair trading, convertible arbitrage, whatnot).

3- You're implementing a rule-based strategy (such as trend following or contrarian strategies)

4- You're implementing High Frequency trading - the infamous HFT... I am not too clear on these (they're not my area of specialisation) and how they truly differ from large scale scalping. Or stealing money by taking advantage of disclosure rules. They certainly are huge volume and are probably increasing the white noise significantly. They might lead to flash crashes.

But they are not going to destroy speculation or value investing...

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That sounds like all those people who said you'd never get a machine to make a chair with the same degree of craftsmanship as a trained human. May be true, but it doesn't much matter.

No, actually, that's not what I said.

That part, automated management of orders and stuff, has already occurred, except in some specific American markets where, irony of irony, the workforce is sufficiently organised and syndicated (they rarely use that term, of course) to prevent it.

So you still have a pit in NYC and Chicago but not in London, Frankfurt or Paris, for example.

Those programmes described, however, can be a natural extension i.e. the management of big orders via automated execution to achieve as close a price to VWAP.

However, while you can trade via rule-based techniques or even invest according to such, you still need someone okaying it. And global macro trading as well as value investing or venture capitalism don't lend themselves well to algorithm trading because they fundamentally ask "What do you think is going to happen in the future?"

If a machine can predict the future or at the very least predict the future better than the best humans in the business then, fine, you proved me wrong. Until then...

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Well, I don't think the suggestion was that it would wipe out investing, but I can certainly imagine a scenario in which trading sharesd in the hopes of making a profit no longer works, and idea of people making a living trying to do so is just redundant as the apcraphyl buggy-whip makers. That of course wouldn't prevent someone investing in a company, it just wouldn't necessarily need a human agent to do it.