This is a follow up from a note I sent last month on an AI program’s attempts at trading stocks. I am indebted to my friends at 7IM for much of what follows.
The finance world can seem like it’s dominated by technology – and in many ways it is, what with high frequency trading, crypto-currencies, and of course, now, AI.
But when people start worrying about the lack of need for human intervention, it’s helpful to remember that markets will ALWAYS be weird enough to need people.
Finance is FULL of weirdness … because humans are full of weirdness – biases, habits, emotions etc. Plugging all of this weirdness into an algorithm is almost impossible to do. Because mostly, it’s psychology at work. Here’s some of the weirder things a computer might miss:
No onions please
You can buy and sell a lot of commodities using futures in the United States. These are financial contracts which ultimately result in the delivery of a real-world product.
If you buy a corn or live cattle future, you need to have a big old barn ready for when your grain or cows arrive.
Or if you sell a nickel or wood pulp future, you’re going to need to have a lot of metal or trees in your back garden to meet your contract.
But – and this would be hard for a machine to figure out – you can’t, ever, buy or sell a future on onions.
Because in 1955, a farmer called Vincent W Kosuga used the onion futures market to buy more than 98% of the available onions in Chicago, making millions of dollars, and driving other onion farmers out of business. The public backlash was so extreme that President Eisenhower banned any trading in onions futures – and the law still stands today.
(There’s a great free podcast here https://www.npr.org/sections/money/2015/10/14/448718171/episode-657-the-tale-of-the-onion-king).
Touch the seat to trade
Or, try explaining to a computer why it has to be touching the red sofa in order to make a trade on the London Metal Exchange (below). And then try to find an algorithm with a leg!
Source: London Metal Exchange
Unknown currency conventions
Or, try to explain how the convention of currency quoting works on global markets – do you say “pounds per US dollar” or “US dollars per pound”. Important to make sure everyone’s saying the same thing on a market that trades $7.5 trillion a DAY!
The good news is that there IS a hierarchy of which currency is the “base” (i.e. the Y, in X per Y) - :
1. EUR
2. GBP
3. AUD
4. NZD
5. USD
6. CAD
7. CHF
8. JPY
You’ll note that the US Dollar (by far the most important global currency) comes 5th. Is there an explanation for that? Absolutely not – there are no rules written down, it’s just passed from one currency trader to another when they start trading!
When it comes to capturing the human element of markets (or life), there’s likely to be a few stumbling blocks, even for the smartest computer …
However, it never pays to become too complacent, I remember a time when the idea of driverless cars and trains was unthinkable!
I hope you have found this interesting but, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
