The stock market has a major place in human societies. In a way, it’s almost like the beginning of a technological singularity – a merging of mind and machine. That’s because major global markets in stocks, bonds, commodities, foreign exchange, etc are run by primates and robots. When I say that, I’m referring to humans (primates) and trading algorithms (robots).
Since the stock market is often driven by interactions among people and algorithms that have varying short-term and long-term goals, it’s difficult to use the stock market as a source of predictive information. Many of the trading exchanges and hedge funds are also run by sociopaths with a digit ratio indicative of excess prenatal androgen exposure. I decided to ignore the stock market for the most part and pay attention to science – especially medical research and techniques that can be used to regenerate baby boomers and make trillions of dollars.
In my last post, The Science of Traders, I discussed the biological aspects of trading. Now I will link to some recent research on the algorithmic aspects of trading. This is an area shrouded in secrecy, as an informational advantage can lead to immense returns. Clever primates at hedge funds want to outsmart the clever primates at the other hedge funds, so they like to keep their algorithms secret. Hence the case of Sergey Aleynikov. This secrecy also means that many academics haven’t covered the field of high frequency trading in great detail.
Here are some Google Scholar search queries to find research on algorithmic trading and high frequency trading:
The quantitative finance section of arXiv is also frequently updated with new papers.
Especially fascinating is the work of Dr. Didier Sornette, a professor who studies the formation and dissolution of bubbles in markets.