Tag Market Trends

Posts: 3

AI Trading & Lehman Brothers?

WOW! I posted this over 12 years ago. Talk about being spot on the money! I hate to do this but I'm going to quote myself here:

I firmly believe that data mining, AI, and machine learning trading will accelerate over the years. Who knows, maybe my little model will move markets one day! :)

As far as the trend in AI goes, it's really getting started now. AI is being adopted by the next tier of companies. We're out of the "innovator" and now "early adopter" phases. We're starting to move into the "early majority" phase, and this is where it gets good.

Adoption Phases Adoption Phase Cycle

I'll write more on this late but I want to go on a tangent here. I'm cracking up. LEH-FUCKING-MAN BROTHERS. WOW. It's amazing what I can find in my archives back then. Remember Lehman Brothers? They blew the fuck up because of bad bets in the MBS markets.

They used to be so 'bad ass' but then they kept too much risk on their balance sheet and the Fed refused to bail them out, they set off the financial crisis. I posted a link to an article a few days later where Richard (Dick) Fuld got punched in the face at the gym. A 150 year company that was destroyed in a matter of days because everyone was greedy.

LEH filed for bankruptcy on September 15, 2008, a little over a year later from my AI post. It's mind boogling, it had $639 Billion in assets with $619 Billion in debt. The charts are damn right frightening but the good news is that AI is still here.

LEH, Daily Chart to collapse Lehman Bros. (LEH) Daily Chart prior to collapse

LEH, Daily Chart prior to collapse Lehman Bros. (LEH) Weekly Chart prior to collapse


Investing in the S&P500 beats AI Trading

I forgot to link to this image back in early May 2019. It's from Bloomberg and it makes a lot of sense, maybe eye opening for some.

Investing in the S&P500 beats AI Trading

Essentially it shows that the market is the be and end all. Of course the market is an average and there are funds or AI traders that beat the average, but others will underperform the average. Over time, your little 'edge' will eventually underperform and you have to keep writing new code and new strategies. You can write all the trading algorithms you want but in the end it'll be futile.

If you started using the AI back in 2016, you would've outperformed the S&P500 for a short while but then...

Save your time and just do passive investing. Buy high quality funds and ETF's with low expense ratios over a diverse asset class. That's it. Then rebalance once or twice a year.

Yeah, but Tom you post Forex and Stock stuff from time to time. Yes, I do and I have some 'mad money' that I trade to satisfy that itch. Do I trend follow with that mad money, yes. Do I go long or short currencies, yes. Have I started writing Python scripts to crunch market data and build charts? Yes, I do that so I can learn Python better and it's what I do to keep myself in the market Zeitgeist.


Wall Street Using AI To Trade

I heard this first on Bloomberg Radio and then found the article. It's about the ever increasing use of data mining and AI in the financial markets.

In his cubicle overlooking the trading floor, Kearns, 44, consults with Lehman Brothers traders as Ph.D.s tap away at secret software. The programs they're writing are designed to sift through billions of trades and spot subtle patterns in world markets.

Kearns, a computer scientist who has a doctorate from Harvard University, says the code is part of a dream he's been chasing for more than two decades: to imbue computers with artificial intelligence, or AI.

That's precisely the strength of an AI model, the ability to find and learn subtle patterns and help you find an emerging (or ending) trend.

Financial service companies have already begun to deploy basic machine-learning programs, Kearns says. Such programs typically work in reverse to solve problems and learn from mistakes.

Like every move a player makes in a game of chess, every trade changes the potential outcome, Kearns says. Machine-learning algorithms are designed to examine possible scenarios at every point along the way, from beginning to middle to end, and figure out the best choice at each moment. [By Jason Kelly]

I firmly believe that data mining, AI, and machine learning trading will accelerate over the years. Who knows, maybe my little model will move markets one day! :)