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Wired: Algorithms Take Control of Wall Street

Wired Magazine published an article, Algorithms Take Control of Wall Street, which explains how Wall Street is ruled by thousands of little algorithms. You can listen to an interview with one of the authors, Felix Salmon, on National Public Radio's Fresh Air: How High-Frequency Trading Is Changing Wall Street(about 20 minutes).

Per the Wired article, by some estimates computer-aided high-frequency trading now accounts for approximately 70 percent of stock market total trade volume.

What drives these computers, these little algorithms? Information.

The article points out that Dow Jones launched a new data service called Lexicon which sends real-time financial news to professional investors. Many of the "professional investors" which subscribe to Lexicon are not humans, rather they are these computer algorithms.

Will these algorithms find the SEC XBRL information beneficial? Maybe. I would even go as far as saying probably at least a little. After all the information is only released quarterly. I am no expert on what information drives Wall Street decisions, time will tell if this information is helpful. But if 70 percent of the trades are made by computers rather than humans, could it be the case that the type of information needed might change?  Are financial statements as we know them obsolete, perhaps to be replaced by Twitter tweets of thousands of fragments of information which investor relations departments use to disclose company information? How will that information be audited? Who knows, but this is certainly interesting stuff which raises a lot of questions in my mind.

And what about this.  I have worked in two other "markets": specialty lumber and produce.  Both were quite interesting and had different dynamics. Few of us realize or pay much attention to the fact that the price of a box of lettuce can fluctuate between $3 a box and $26 a box and how that fluctuation can impact consumers and others in the supply chain.

The stock markets have probably spent millions, if not billions on all the infrastructure to make that supply chain work, to get to the point where automated computer driven trading is even possible. What if the costs of this infrastructure dropped substantially so that other markets, such as specialty lumber and produce, could afford such technology?

That is exactly what XBRL does. When I worked in the produce industry, the little company I worked for created some pretty impressive stuff using PCAnywhere, dial up phone connections, CSV data formats, and Microsoft Access 1.0. We still had lots of additional opportunities and lots of tasks where we interfaced with the outside world was done via FAX machines and telephone calls, but internally we had it together more than most.  But this was in the early 1990s.  I would love to go back there now and see what I could do using the Internet, web servers, XBRL, and all these other new tools we have at our disposal.

In chapter 7 of my book XBRL for Dummies I talk about business information supply chains. If this stuff is interesting to you there is a lot more information there.  XBRL is making automated computer business information exchange more cost effective for more than just financial reporting. These little algorithms will be working in lots of other industries performing lots of mundane tasks which humans perform today because it is not cost effective to automate those processes.  XBRL changes that. Not all processes will be automated, just the ones which make sense or the parts of processes where human judgement is not necessary.

What can you automate in your supply chain?

Posted on Friday, January 14, 2011 at 07:46AM by Registered CommenterCharlie in | CommentsPost a Comment

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