Material World

Quentin Cooper : Ahh the Prime of Miss Jean Brodie,third star on the left and straight on till morning side!
Hello,today Bishop Barnaby,the Cushcow Lady and the sexually transmitted diseases they're spreading.We'll reveal all and reveal why this isn't the sort of behaviour to provoke shocks and stares after we've taken a filthy lucre at stocks and shares,and why it maybe time for the market to invest in new technology.

"There's been another big fall in the city.The FT 100 share index fell 202 points to close at 40.45. In New York the Dow Jones...."

[See New Scientist  4 Apr 98 & 6 Dec97]

I'm not really somebody who knows much about high finance and investments, I throw away the Money section of the Sunday paper unread and call me stupid I don't even listen to Money Box,but even I know the markets have gone beyond bull and bear of late,and been more abominable snowman. Fortunately,amid this  blizzard are wizards working at ways to iron out some of the stock markets ups and downs and keep thing on the even keel.

[Well -Quent it's not easy keeping things on an even keel  - I should know - see members.fortunecity.com/templarser/chaosflr.html]

Humans have their problems,see under Leeson,Nick for details,and increased computerisation has apparently contributed to some recent spectacular falls with automated responses turning a slight market twitch into a fully fledged spasm. What Dave Cliff of Hewlett Packard labs in Bristol and others are working on is something that keeps some of the best aspects of humans and computerisation and loses some of the worst.
His team are developing artificially intelligent electronic traders,but are ordinary investors ready to trust artificial intelligence with their real investments and what if these software robots just put everything into stocks of the Sirius Cybernetics corporation?
 Dave Cliff is here to explain,and we're also joined by a genuine human trader,Lawrence Barwick from Bank of America's London Office. Lawrence Barwick,what's your particular area of expertise in trading?

Lawrence Barwick :  I'm in charge of trading currencies and interest rate futures for the bank on a proprietary basis,that means that we use the bank's capital to invest in currencies and the future's markets.

Quentin Cooper :  Okay,don't get too financially detailed for me,I've already warned you about this. Now when I think of city traders,I think like a lot of people,people in garish blazers waving their arms and shouting rather more than they seem to need to,is that the way it still is?

Lawrence Barwick : No,it still continues,but we've got a lot more civilised of late,in Europe the main future's exchange is life and Eurex have gone completely electronic so the shouting has gone. In the US we still have the human interaction,the pits are there,and the Chicago markets and that continues. In my own world,which is currency trading,you used to see the occasional news item where you see a dealing room a chap standing up with a phone to each ear shouting at each other,sadly that is diminishing and the electronic platforms such as EPS and Reuters are replacing a lot of that,so we come...

Quentin Cooper :  So clearly this is a period of transition,the electronic is moving in,and the human element and the phones to the ears is going out?

Lawrence Barwick :  Technology is key to banking and investment in general so it is affecting us greatly.

Quentin Cooper :  So Dave Cliff,if we've already got a lot of electronic trading that's up and running,what are you doing that's different?

Dave Cliff : Well the early electronic trading systems,were not much  more intelligent than thermostats,they basically looked at a share price and if it went above a certain level they would buy,if it dropped below a certain level,they would sell,and...

Quentin Cooper :  Is this why we sometimes saw these sorts of knock on effects? 

Dave Cliff :  Indeed,yeah,and the crash of '87 is widely attributed,to have at least been made worse by such trading systems.

[It is a consequence of the simple inflexible dynamic which can cause feedback amplification effects in a system such as that as detailed in chaosflr.html  - LB]

Quentin Cooper :  So leaving a thermostat in charge of the world's finances?

Dave Cliff :  Err I wouldn't want to say that! So in '96 Hewlett Packard labs in Bristol,I developed a form of automatic trading agent,so it's a piece of computer software which is self contained and looks after itself and it does pretty much what the people in the trading pits do,so it listens to all the offers to sell and all the bids to buy and adjusts its price accordingly in order to try and get the best price  possible.

[To me - this still is not understanding the nature of those dynamic systems - to have them in a state of flux bidding against one another means they are still a "chaotic system" which is prone to boon and bust as  Robert May explains about natural organic systems - whilst the AI systems may get rid of the wild fluctuations due to panic on the stock exchange via rumour of a sell etc - the essential nature of a system involving myriad components all doing the same thing  will be subject to the behaviours shown in members.fortunecity.com/templarser/rhythm.html & beffect.html & mastring.html - LB]

Quentin Cooper :  And how's it doing this?

Dave Cliff :  Well it's using some fairly simple Artificial Intelligence techniques,I actually originally developed them really just to settle an argument I had with a couple of economists,who said that you don't need any intelligence at all,and I proved that you do need a little bit of intelligence,but not an awful lot..but then...

Lawrence Barwick :  You obviously based that on me Dave!

Dave Cliff :  Err,yes Lawrence! And then....

Quentin Cooper :  Yes ,but there are...isn't there something slightly alarming here,that the debate is whether you need a very tiny amount of intelligence to emulate the work of a market trader or not at all,these are the two options that there are available?!

Lawrence Barwick :  I think that sums it up fairly neatly,yes,certainly in my case.Intelligence, you know is on different levels,I think if you look at the macro picture there is a lot of intelligence,but when you come down to the aspect that Dave's looking at,which is the instantaneous execution,then you know the simplest strategies are often the best.

Quentin Cooper : Again - if we put the phrase market traders and instantaneous execution together,some people may leap to a wrong and cheery conclusion..but...!!! Okay,so we're down there,you say they've got limited intelligence,but how do they apply this,how do you apply this intelligence to them,and how do they apply it to the markets? 

Dave Cliff : Well they were developed ideally just to operate in electronic market places,which were populated entirely by similar pieces of software,so they were never developed or designed to interact with humans. But last summer some scientists in America reported some experiments where they'd actually taken my traders and run them in experiments against human traders,and the HP traders consistently out performed the humans.
So on the back of that we became interested in them really quite significantly,because although the gains in performance are only measured in small numbers of percent,if you look at how much money flows through the stock markets,a tenth of a percent of the 11 trillion dollars that flows through the New York Stock Exchange every year,would still give us a saving or a profit in excess of 10 billion dollars.

Quentin Cooper :  But I can't help but bring to mind here,there used to be a kind of digest of the weeks news which came free with one of the national newspapers in Britain,and I don't think they have this section anymore,but I remember they always had...they analysed the last weeks,you know,top share tips from the best financial advisers and they also had a kind of random dartboard for the stock market as well,and by the end of sort of a year,the dartboard was always doing better than the experts were,so couldn't that just be...couldn't it just be sheer dumb luck that your software is outperforming real people.

Dave Cliff :  Err we think not because these experiments were performed under ..under very strict experimental conditions,so we could kind of eliminate those kind of factors. I think - as Lawrence will probably be able to tell you - there are two schools of thought in stock market trading. People that believe in kind of analysing fundamental information about a company - which are the kind of people that you see acting as experts in newspapers,an there are also people that look at a much more kind of technical perspective,where they apply mathematical models,and in general the mathematical modelling seems to be a more reliable way of doing things.
Fundamentally that's what our HP agents are doing,they're using very,very simple AI techniques - artificial intelligence - to form a mathematical model of what an appropriate price would be to trade at.

Quentin Cooper :  Lawrence,it sounds a bit analogous to the way that some people analyse chess games,you know,you can either go for the kind of intricate move by move,or somehow develop some instinct as this will be the best move but I'm not quite sure why.

[members.fortunecity.com/templarser/chess.html]

Lawrence Barwick :  Yes it's very similar and game theory pops up a lot in Dave and my work.

[see members.fortunecity.com/templarser/wanna.html & multiple.html & http://www.noogenesis.com/game_theory/game_theory.html]

I'd like to comment just on Dave saying that you know economic analysis is outperformed by the statistical analysis,I'm not sure whether I entirely agree with that,even though I'm on the statistical side. I think you need to have a mix and they're just different approaches,and the statistical analysis gives you a very different slant and I like the dartboard idea,because you've got kind of a 50/50 chance of being right or wrong,but to make money in the markets you actually only need to be right about 53% of the time,it's a tiny little advantage that you exploit to make money,however if you're only right 47% of the time,it can be quite a disaster.

Quentin Cooper : So how can you up your percentages here Dave?

Dave Cliff : Well work that we've recently been doing,in fact work that's still under way at HP as I speak,has been looking...

Quentin Cooper : They'll be stopping to listen I hope?!

Dave Cliff : I doubt it somehow! ..has been looking...rather than using AI to design the intelligence in the traders,it's actually been looking at the rules of the market place by which the traders interact,and we've been using a thing called a genetic algorithm,which kind of draws inspiration from evolution in nature by trying out random variations and allowing the more successful variations to breed and become more popular.

[see members.fortunecity.com/templarser/algo.html & latham.html]

One of the things we've have discovered is that there are new forms of electronic market places which in fact that the genetic algorithm has discovered that are unlike any traditional human designed electronic market places,and it kind of makes sense,if you ...why use a market mechanism or a set of rules for the market,designed by humans for humans when in fact you're intending to not use any humans in the system?

Quentin Cooper :  Yeah,why teach them to play a game that humans are better at simply because of our physiology or partly,and why not change it to a game that better suits them.

Dave Cliff :  Indeed yeah.

Quentin Cooper : But does that mean there maybe things which spill off from this that human traders can learn from,or will this only work for electronic traders. I mean could we actually run the world's stock markets in a different and better way than we are currently doing that?

Dave Cliff :  That's an open question.We were the first people to make this discovery. In fact a team at Liverpool University made a similar discovery a few months later,and the likelihood is that these new market mechanism designs maybe more useful for human traders,but we would need to do more experimental work to establish that.

Quentin Cooper : Lawrence,what do you think of this idea? Is this a kind of takeover technology d'you think or is this going to coexist with what you do?

Lawrence Barwick :  I think it coexists,we're always looking at new technology,especially in the way that my group at the bank trades,technology drives us forward and we always have an eye on it,and I think the way the market operates can evolve,and the work that Dave has done is at the smart end of the technology web,where he's really thinking outside of the box to try and see what might be possible,we're at the application edge of the wedge to see you know what we can actually make practical use of and I think we'll end up with a hybrid - nobody really knows what's going to happen as systems become more electronic,and any research is valid and I'm particularly interested in Dave's approach - because he has taken the time - Dave and I met a year ago - has taken the time to come out of the ivory tower and talk to a city institution. 

[see members.fortunecity.com/templarser/ivory.html]

Quentin Cooper :  Yes because presumably there are lots of people out there who've had half these thoughts and had these conversations with economists but haven't actually taken it to the next stage and tried to develop the product which could in fact change the world's stock markets?

Lawrence Barwick :  Yes.

Dave Cliff :  Yes.

Quentin Cooper :  But d'you think Lawrence that if you two are working together and others are working together then what we're going to see developing out of this is going to yes fine somehow in the future lead to a new way of doing things,but is in the short term - as with all periods of change,going to lead to yet more instability,which is the last thing the stock markets need?

Lawrence Barwick : Err any technology that you have coming in,changes the working practices and the people who are involved in those working practices will have concern,but we have to embrace that and explore the potential of it to make the market better. We're trying to get the best price as Bank of America for our customers,and anew technology like this might allow us to do that,so we're going to look at it. We can't lock the door,the. .you know..new ideas always escape from the lab,I mean in Dave's case I would visualise his robots as having 8 legs!

Quentin Cooper :  Yes we should make it clear I think perhaps that these robots are...these robots exist in ....

Dave Cliff :  Purely inside the space..yes.

Quentin Cooper :   ...conceptual form if you like.

Dave Cliff :   They're not physical objects.

Quentin Cooper :   Because you don't need to have the physical object?

Dave Cliff :  No,that's right.

Quentin Cooper :    Do you think..? I mean we've talked about the idea that they can co-exist,and obviously you're still going to need at some level somebody to program them and somebody to oversee them,but is there any reason why you couldn't have an entirely electronic universe in the future,doing all this?

Dave Cliff :   Well I think the point that Lawrence made earlier was a very good one which is that the technology that I've been involved in developing is good at executing on trade,but deciding which trades to execute is something that requires much more intelligence,and so that's likely for the medium and long term to remain the domain of human traders,but when they have decided which trades they want to execute,you can imagine them devolving responsibility to online trading agents which can act much more quickly than humans,and which can operate for 24hrs a day,7 days a week.

[The odd thing is that the speed of reaction is possibly a component in the potential to cause a crash - that is if one piece of data in the activity is picked up on and reacted to with lightning speed - does it make the system more or less stable - generally speaking delays tend to have a dampening effect on massive changes - the rate at which something propagates through a system affects the behaviour of that system - rather as say one would oscillate a rope doing it slowly causes changes to propagate - doing it quickly eventually causes confusion as one part of the rope going up is quickly told to go down before it's had a chance to complete an up cycle - it's possible robotic agents could actually ADD to the potential to have stock market crashes,but one imagines that these people have checked this out - LB]

Quentin Cooper :   You got them devolving and evolving now,but I was just wondering if these devolving algorithms evolved far enough,so that what works - works brilliantly, but only works for these electronic traders,that there just might be no way for humans to fit into the system,the same way that historically,obviously there's been no space for electronic traders to fit into the human system?

Dave Cliff :   Yes,it's not impossible - I think there are issues of trust and accountability,if you look at autopilots in passenger jets,an autopilot could in principle,fly the plane,but we still like to trust the fact that there's a human there,the pilot,who will take responsibility if things start to go wrong, and I think that in the financial markets,similar situations will... (Lawrence chips in and ends the sentence,Dave agrees).

Quentin Cooper :  So this is back to the point that I started with Lawrence,that are we prepared to trust our real investments to artificial intelligence,we'd probably like to think it's a wise human there - rather than a piece of programming that is doing a good job,however good that job is?

Lawrence Barwick : Well the wise humans ideas are distilled into the program,and it just becomes a tool that makes those ideas be applied in a much more rigorous fashion than they might otherwise be.

Quentin Cooper :   And just finally Dave,you said that they don't need much intelligence,is there no advantage in giving them more intelligence,or is it that not very much intelligence is all they need?

Dave Cliff :   That's something we're looking into right now!

Quentin Cooper :   Okay,Dave Cliff,there's a lot of looking on going,Lawrence Barwick,thanks for your stock responses,and for those that care the FTSE 100 is currently up 50.6 at 4415.40,and there's a fund of guilt edged information about robot traders and everything else in today's programme,along with an entire archive of previous Material Worlds you can listen to,at our webpages. Follow the bear to www.bbc.co.uk/radio4/materialworld.