23.1.15

Inside the Black Box


 
A Black Box, is often thought of as the flight recorder found after an airplane crashes. But in scientific circles it is understood as any closed system where the inputs and outputs of the internal processeses are known, though what is happening to create the outputs is the result of such a complex interaction that the internal processes cannot be strictly tracked or determined using a traditional cause and effect method.

Within the financial markets algorithms are bouncing around reacting to each other at the same time as they respond to their programmed variables. A quant can create a brilliant algorithm but once it's unleashed into the black box of hundreds or thousands of others,  they have no certainty of what it will produce. If it does well everyone gets paid (a lot more than you), but it also has the potential to create cataclysmic destruction in seconds.

You may say - well of course we know some things about how the stock market functions! Buy low and sell high!  Invest for the long term, don't bet on bubbles or take high risks without consulting a broker and doing your research. You're responsible for your own choices, right?  Usually that's true, and you can certainly choose to keep your pension investments out of the stock market, and I would too - except I live in Australia. 

The digital marketplace has gone far beyond what an average person can concieve of. Yet our pensions, employment prospects, interest rates, all flow through the playground of traders and the weaving, reactive algorithyms created by the quants. The future of millions of people around the world is risked for the sake of profiting on a fraction of a cent on a trade taking place in a milisecond.  As you'll see in the documentary above and those listed below, many quants will strictly not invest in the stock market themselves. For those with a choice, I'd recommend following their example.

Other recommended viewing:
The Wall Street Code
Quants, the Alchemists of Wall Street
Inside Job - not specifically about high speed trades, it's still the standard for understanding how the abstract nature of packaged 'financial products' caused the GFC
 

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