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Quants, Algorithmic code, Computer platform, Output!

November 12, 2014

The new language of finance/money is now based on mathematics, coding assumptions, algorithms, and pre-programmed computer platforms. Most of our financial trading is now based on the input from Quants (math/engineering/programmers with degrees in higher physics and math) who write code for our banks, hedge funds, and anyone using HFT computers for their trading. These special symbol manipulators (our money is now a ‘symbol’) can create inputs and outputs for a computer(s) which then trade metaphysical cyber currencies (our dollar, euro, yen, etc.) which then manipulates all our financial markets (including select ‘prices’ like silver/gold/oil). Human beings are giving up their trading activities for the machine driven computers which operate on algorithmic codes and pre-programmed software.  Who is aware? Not many! I leave for Las Vegas next week to learn more!

We now live with a totally new financial market which is machine driven and pre-programmed with select ‘if/then/goto’ codes (hidden within a ‘black box’ called an algorithm). Algorithmic trading is becoming ubiquitous and human emotions are being eliminated from all our trading via this new technology. This new trend and technology is revolutionizing all our markets with few pundits understanding what has happened in recent years. Personally, I have been following this trend for the past five years. I have attended many trading (money) conferences to learn more of the philosophy and theory behind this new market phenomena. I will learn much more next week at the Las Vegas Trading Expo. Automated trading is taking over now that practically all of our Stock Exchanges have converted to electronic trading.

The 2014 Trading Expo is November 19-23, 2014. My focus will be to better understand Algorithmic Trading, Black Box coding, the role of Quants, and the profits which can be made using Automated Trading strategies!

What we now need to recognize is that most of our ‘prices’ for commodities and goods are created from these machine driven programs. Computers have taken over most trading and price discovery. Recently, the price ‘fixing’ for silver was changed to an electronic form of ‘price discovery’. This form of ‘price discovery’ emerges from prior computer trading within our algorithmic (electronic) markets. A trading robot (pre-programmed with a ‘black box’ algorithm) does the trading via computer software which operates automatically and where NO human emotion is allowed. Prices now emerge from ‘black box’ trading and pre-programmed software which operates pursuant to a pre-designed code (written by a Quant). Quants are computer programmers who create algorithmic codes (if/then/goto) models which operate automatically and trade a commodity/derivative asset/stock/ETF, etc. automatically with another computer operated by the electronic Stock Exchange. This is creating a whole new world of trading and pricing which few currently understand.

Quants write the CODE which underlies an algorithm and which executes a trade automatically! No human emotion is allowed when trading with a pre-programmed mathematical code! Most market-makers are also now a computer (operated via pre-programmed codes/algorithms)!

I have been watching the price discovery process for the commodity called SILVER for the past five years. Since mid 2011, this ‘price’ has been steadily declining even though the DEMAND for the commodity has been growing. How could this happen? Why does historical Supply/Demand not work today for this commodity? One reason is the manner which ‘price discovery is now created. Today, practically all of our markets have been converted to electronic markets. The historical OPEN OUT-CRY system for creating ‘price discovery’ has been abandoned. Paper trading has been made obsolete with our new electronic trading (which uses our digital dollar for trading transactions). Today, traders create all our ‘prices’ via the electronic computer and most of our high-speed computers are now pre-programmed with code (algorithms). What is an Algorithm?

A typical process/logic for creating an Algorithm! Any large financial institution can have a Quant create a specialized trading algorithm for their use. Could a trading algorithm monitor and control the ‘price’ of silver? I would suggest, YES!

An Algorithm derives from math and symbol logic. Quants are people who write this code (using symbol/word logic) which then operates within our electronic computers. Computers do most of our trading today (Nationally and Globally). Computers do not need any human emotion when they trade automatically from pre-select codes (the black box which operates the symbol/word logic). Quants write this code and the computer operates (and trades) this code automatically and at realtime speed of light decisions. A human trader can go out to lunch/dinner and still follow what their computer is trading…and then increase their cyber profits from these realtime transactions. Some of these algorithmic codes are so successful that some traders make profits daily and continually with some 90% or more success. This is often called Automated Trading! I will be attending a workshop on this Automated trading next week in Las Vegas to learn more.

A few media sources have published some details about Quants and their effect on our markets!

Let’s conclude this missive with my theory of why the ‘price’ of silver is declining in realtime computer trading while the Supply of this commodity is decreasing and while Demand is increasing. A real paradox! Think about a new concept which is called the ‘naked short’ trade. This trade can now be executed (say on the Globex electronic market) with a pre-programmed algorithm. A ‘naked short’ trade is different from a regular ‘short’ trade. A regular ‘short’ trade requires me to BORROW shares of existing stock prior to executing the trade. A ‘naked short’ trade, however, allows me to trade a commodity (say silver) without BORROWING any existing shares. I can merely ‘short sell’ shares (contracts) AS IF if owned them (I call this a phantom transaction). I am selling silver that did not EXIST within our realtime markets!

This process (called the ‘naked short’) creates an ARTIFICIAL (phantom) supply of a commodity (say silver) when I ‘short sell’. This transaction (if accomplished via an electronic algorithm at near the speed of light) would drop the ‘price’ of silver immediately on the electronic markets (say the Globex market). As the ‘price’ declines I could CANCEL the electronic trade AFTER the ‘price’ has declined and then repurchase to make a handsome cyber profit. During this transaction (executed in milliseconds) there is NO DELIVERY of the physical commodity. The concept called ‘delivery’ is usually a three-day operation AFTER the ‘naked short’ is executed electronically. Since there is no delivery (no covering during the trade) within this speed of light electronic transaction (called a ‘naked short’)…it none-the-less AFFECTS ‘price’ of physical silver. The PRICE of physical silver gets knocked DOWN during the realtime (millisecond) transaction. Can you discern why this ‘naked short’ transactions should be illegal (and some say it is illegal)? Go to: http://www.paulcraigroberts.org for additional understanding of this process!

Could a ‘naked short’ drop the price of physical silver in milliseconds as above? How can ‘delivery’ take place when a trade is executed within milliseconds and then cancelled? The three-day delivery option is meaningless when trading in milliseconds! Currently, physical silver trading represents less than 1% of all the trading volume! How can ‘price discovery’ be fair and market based when phantom trading of silver is allowed?

Which trader/trading desk/financial institution could be using this electronic ‘naked short’ strategy for knocking down the price of silver? Who do you THINK might desire that silver and gold be SUPPRESSED so that our cyber dollar (now merely a digit in the computer) LOOKS good and real? Could a Central Bank desire this outcome? Could a governmental institution desire this outcome? Could a proxy commercial bank be involved in the SUPPRESSION of the prices of silver and gold? What do you think? My sense is that all our electronic/computer/algorithmic/coded/high-speed MARKETS are now mostly MANIPULATED. To discern this reality, we need to comprehend the DETAILS underlying how our markets operate. That is my missive for today! Think about this concept called market manipulation and coded algorithms for trading! I am: https://kingdomecon.wordpress.com.

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