Tuesday, 6 March 2012

Watson: the future of algo trading ?

News emerged today that the IBM supercomputer which defeated the champions of "Jeopardy!" almost a year ago was hired by City Group to analyse financial, economic and client data. Its main capabilities include translating natural human language into quantifiable objective data, an extremely refined form of what some algorithmic trading bots can accomplish at the moment. It will most likely be used to read and analyse SEC reports and market developments and issue prompt trading suggestions. Ladies and gentlemen welcome to the future!

Elementary, dear Watson!

One of the issues that Watson may face in the financial industry is what every computer scientist knows very well. One may create the best program with the most efficient way to go around a problem, but if one feeds it with faulty input, his output will be faulty as well. To put it short: dirt in, dirt out. It is a cause of concern that now, when the majority of trading and market-making in most of world`s market is conducted by algorithmic trading bots, minor failures in the way their algorithms are designed (for example not accounting for feedback loops with other algos) are likely to create more and more flash crashes and fat fingers.

Meanwhile, this will be of great help towards the bottom line of IBM. The IT services company expects to generate billions in revenues from putting Watson to work. And it is not only the financial services industry it found a place in: Watson is also helping WellPoint and Seaton Health Family go through zounds of client data and emit relevant and objective recommendations.
Watson “can give an edge” in finance, said Stephen Baker, author of books The Numerati and Final Jeopardy, a Watson biography. “It can go through newspaper articles, documents, SEC filings, and try to make some sense out of them, put them into a context banks are interested in, like risk.”
Until Watson will be trusted to start trading on its own, small individual traders will nevertheless, start being phased out of the market by less refined algo-bots.

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