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Algorithms now determine everything, or do they?

Algorithms now determine everything, or do they?

Just as nobody is more than ten metres from at least one rat in Britain, so the civilised world we live in is no more than ten minutes from a cataclysmic event which could create irreversible havoc.

In a story about algorithms and how maths geniuses are replacing human bankers, Sarfraz Manzoor wrote in Seven magazine (21 July 2013) about an incident that was generally unreported but illustrates how close to danger systems are.

Hoax Tweet Threatens Financial Meltdown

He said that in April this year a ‘shady group of technology nerds calling themselves The Syrian Electronic Army hacked into the AP news agency that two explosions in the White House had injured Barack Obama.

It was not true, but the tweet was instantly flagged by Wall Street trading computers programmed to spot proximities of trigger words, in this case Obama, bomb and White House. The spotting led to direct trades in millions which wiped $200 billion of capital in seconds.

A few minutes later, the hoax tweet was confirmed and stock levels returned.

But Manzoor posed the question: ‘if one false tweet could have such an enormous impact on the financial markets, just who was running Wall Street? Humans or machines?’

The answer, of course, is that machines are.

Software Programs Now Buy and Sell

On stock exchanges, it’s not frantic traders like you’ve seen in the movies. It’s programs that use complex algorithms fed by a constant stream of data from every conceivable output including rolling news that move money around, not people.

Hedge funds, investment vehicles, accountants and advisers, it looks as if almost every organisation is now hooked into their own often secret algorithms to determine every transaction.

Your application for a credit card or mortgage is decided by an algorithm and one that is pre-set to a series of quite tight criteria, always favourably skewed to the financial institution.

When the weather changes, it is algorithms that set off deliveries to the supermarkets – barbecues and burgers in the heat, de-icer and soup in the cold. It’s not experienced managers who decide.

Amazon’s complex web of ordering, stocking and deliveries is driven by algorithms, what else?

Google’s algorithms have long been notorious for periodically moving the rankings from searches, towards sites that its data suggests is what the surfer wants to see from his/her previous history.

History Made Today Inevitable

Manzoor explained how mathematicians entered the world of finance. After the 1969 US moon landing and in Europe the fall of the Berlin Wall led to an influx of scientists to Britain, all made a new discipline inevitable. Quantitative analysing.

Hence the current term, quantitative easing for the licensed printing of money by governments to prop up the financial system we have become used to in the past five years.

The science these new entrants or ‘quants’, mathematicians and scientists, had in common was, according to Manzoor, ‘a new methodology based on analysing data and a faith in sufficient computer firepower to predict the market.’

And so we have come to what Manzoor called ‘the age of the algorithm.’ It’s the era of probabilities, maths, unquenchable analysis of data and huge volumes of tiny amounts.

Speed Is Everything

Trades have to happen in the instant any movement is noticed, so speed is the driving force of all the maths. Manzoor reported that some firms have started moving their servers nearer an exchange ‘to speed up connection times.’

He cited the Spread Network direct cable between New York and London which shaved less than 1,000th of a second off transmission times between stock exchanges. That sort of fraction makes the difference between making millions and making trillions.

The short termism of the milli-second culture is creating volatility in markets and replacing human judgements which are like: hang on, wait a moment, something else could come up…

But increasingly the algorithm is king, the human touch is history.

Posts worth adding in to your thinking:

Big Data Is Big News, Big Opportunities and a Big Problem, 30 January 2013

The Way We Live is Exposed in Statistics, Data and Real Opinions, 7 January 2013

Bar Charts Reveal What Real Businesses Need to Know, 22 August 2012

Improve Your Google Places Listing, Or Vanish, 2 April 2012

Image: Zwoelefant