*Please distribute to others who may be interested...* You are hereby invited to the next weekly seminar in our interdisciplinary series on Evolution, Complexity and Cognition<http://ecco.vub.ac.be/?q=node/108>(ECCO) and theGlobal Brain Institute<http://www.globalbraininstitute.org/>(GBI).
*Time*:* Friday, November 16th, *14:00-16:00 p.m *Place*: *Room 3B217 * (building B, level 3, From the elevator take the long corridor to the right, to its end), on the VUB Campus Etterbeek (Pleinlaan 2, 1050 Brussels), Free entrance: everybody welcome! ------------------------------ The financial market as an algorithmic “global brain” - a view from the field of market impact modeling *Henri Waelbroeck <[email protected]> * Abstract: Institutions execute large trades over time by slicing them into small pieces that can be digested by electronic markets. The market sets a fair price to provide the liquidity at which each slice can be filled; each slice moving the price a little bit. Over time these liquidity-driven price moves can accrue to become quite large. Understanding market impact of large trades is important for those providing liquidity, but also for the returns of pension funds and to estimate the liquidation values of portfolios with large holdings. For many years Kyle’s well-established impact theory predicted that market impact per share should grow linearly with the trade size, yet practitioners observe that impact appears to be a square root function. How does the collective behavior of market practitioners lead to a contradiction with theory? We review our experience as theoreticians who happened to become practitioners in the world of arbitrage trading and present a theory for market impact that explains the shape of the impact function from the basic equations of hidden order arbitrage. The theory shows that the square root function follows from the Pareto exponent of the hidden order size distribution, which is 1.5. This brings up an interesting question. Few outside academic circles are aware of the value of this exponent and hidden order arbitrage theory is new - how then does the market know to provide liquidity according to a square root impact function? We explain how the financial market can be viewed as a global algorithmic brain, where the double-auction process combines signals from an ecology of algorithms which in turn consume prices as inputs. This feedback loop leads to effective interactions between algorithms and enables the emergence of global intelligence. As a result, the market as a whole knows how to solve problems unbeknownst to its inventor, man. Among these, the market knows how to price the market impact of large trades; it also knows how to price equities, bonds, sovereign spreads… or so we think. We review evidence of recent “epileptic seizures” in the global financial brain, and consider how the forces driving the evolution of this brain can potentially lead to psychiatric disorders with serious consequences to our everyday lives. References: 1. Christopher R. Stephens, Henri Waelbroeck: Schemata Evolution and Building Blocks. Evolutionary Computation 7<http://www.informatik.uni-trier.de/%7Eley/db/journals/ec/ec7.html#StephensW99>(2): 109-124 (1999) 2. Christopher R. Stephens<http://www.informatik.uni-trier.de/%7Eley/db/indices/a-tree/s/Stephens:Christopher_R=.html>, Henri Waelbroeck, S. Talley<http://www.informatik.uni-trier.de/%7Eley/db/indices/a-tree/t/Talley:S=.html>, R. Cruz<http://www.informatik.uni-trier.de/%7Eley/db/indices/a-tree/c/Cruz:R=.html>, A. S. Ash<http://www.informatik.uni-trier.de/%7Eley/db/indices/a-tree/a/Ash:A=_S=.html>: Predicting Healthcare Costs Using Classifiers. GECCO (2) 2004<http://www.informatik.uni-trier.de/%7Eley/db/conf/gecco/gecco2004-2.html#StephensWTCA04>: 1330-1331 3. S. Altunata, D. Rahklin and H. Waelbroeck, Adverse selection vs. opportunistic savings in dark aggregators, J Trading 2010 (5) #1. http://www.iinews.com/site/pdfs/JOT_Winter_2010_Pipeline.pdf (free) 4. A. Criscuolo and H. Waelbroeck, Optimal Execution and Alpha Capture, J. Trading 2012 (7) #2. http://www.iijournals.com/doi/abs/10.3905/jot.2012.7.2.048 (fee required) The Speaker: Henri Waelbroeck is Global Head of Research at Portware LLC, New York. ( http://www.portware.com/flash/index.html). Henri is the author of 25 patents on institutional trading technology and academic publications in Complex Systems and Theoretical Physics. He founded the business intelligence company Adaptive Technologies, Inc in 2001. and its finance spinoff ATi Finance in 2007. From 2004 to 2007 he managed a high frequency trading operation to form a bridge between continuous-market liquidity and the Pipeline block market, with a mandate to supply block liquidity at attractive prices while limiting losses to the trading operation. He then developed an algorithm switching engine at Pipeline, intended to help institutional traders optimize the execution of large trades, and ultimately developed a quantitative method to profile portfolio manager orders and propose optimal trading strategies. He joined Portware in June 2012 to deploy this invention under the "Alpha Vision Services" group. ------------------------------ * Forthcoming ECCO/GBI seminars* *Winter 2012-2013* * *** *November 23 * David R. Weinbaum (Weaver) <http://clea.academia.edu/DavidWeinbaum> (Global Brain Institute, VUB <https://sites.google.com/site/gbialternative1/>) Scalable cognition and its modelling with chemical organization theory<http://ecco.vub.ac.be/?q=node/197> * November 30 * *Juho Salminen <http://lut.academia.edu/JuhoSalminen> *(Lappeenranta University of Technology) SuperCrowdsource Me <http://ecco.vub.ac.be/?q=node/196> * December 7 * *Joël de Rosnay <http://www.derosnay.com>* Internet epigenetics: how to modify the DNA from inside?<http://ecco.vub.ac.be/?q=node/198> * December 14 * *Ben Goertzel <http://wp.goertzel.org/?page_id=58>* General Artificial Intelligence and the Global Brain * December 17 (Monday) * Johan Bollen <http://informatics.indiana.edu/jbollen/Home.html> (Indiana University) More info about the ECCO seminar program: http://ecco.vub.ac.be/?q=node/108 -- David R. Weinbaum (Weaver) ECCO/GBI Seminar Coordinator Email: [email protected] http://clea.academia.edu/DavidWeinbaum
