Don’t Worry About Institutional Computers

Posted on November 2nd, 2007
Written by Richard
Posted in: N/A (old archives)

You know, ugly was probably the first one to point out to me this argument that computers will soon make human traders obsolete. But, lately I have been thinking that there’s no reason to be concerned.

Ever since I read The Poker Face of Wall Street, I’ve found it enlightening to look at all the various markets as gambling arenas. The book is very compelling in this regard. After all, if the stock market were really primarily for facilitating investment at fair prices, they could just collect all the buy and sell orders and process them once or twice a day at the fair market price (and that’s just one example from the book).

You know, they have a computer program that’s solved checkers (it plays perfectly). Would you bet money that you could beat that program? Neither would I. Would you buy a computer chess game if it didn’t have a crippled mode that you can actually compete with? Neither would I. You don’t hustle someone at a pool table by crushing them right away. Do you see where I’m going with this?

Any gambling establishment will tell you that they need a steady stream of amateurs coming through to keep the pros (and the house) fed. The book has a demographic breakdown of a poker house in one chapter, and it looks exactly like what I imagine the trading demographic is. A large number of people take money from their jobs and mostly lose it at the tables part time. Exponentially smaller groups play professionally at a subsistence level, and a tiny group gets wealthy. A system like that just doesn’t work without a steady stream of amateurs who think they have a chance of winning.

So, that tells me that the big players probably like the game just fine the way it is. They don’t want to collude to crush the amateurs in an obvious and spectacular fashion (and thankfully, I think there are enough big players that they would pretty much have to collude)… they would much rather bleed them dry slowly over time. And, they sure as hell don’t want to speed up/gap everything until it resembles the fabled “efficient” market, because no one can beat that game.

To me, this means that the trading game will always be easy enough for most amateurs to win sometimes. Specifically, they’ll be able to win often enough to keep them hooked. And that means I will always be able to make consistent money by making sure I’m better at it than most amateurs. That doesn’t mean that the game won’t change dramatically going forward. That also doesn’t mean that most amateurs won’t be trading with super-fast, artificially intelligent computer agents one day… but I have a feeling I’ll still be one step ahead of them, when it happens. :-)

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