How Algorithms Shape Our World

August 29, 2011

We’ve written before on how high frequency trading and black box technology are changing the face of hedge fund technology. By some estimates, such algorithmic trading accounts for 70 percent of all trades taking place today.

Now Kevin Slavin, co-founder of the game development company Area/Code, takes things a step further with an entertaining and eye-opening video presentation on TEDGlobal of how algorithms are increasingly shaping our world.  From the Google search algorithms to Amazon algos that give us “recommendations” online to those that automatically play the stock market (and yes, sometimes crash it), we now live in algoworld, like it or not.

Slavins proposes that we look closely at the role of contemporary math in our society. It is transforming from something that we used to describe our world to something that is actually shaping how we live.

Case in point: there are some 2,000 physicists at work on Wall Street. That trend developed, in part, because institutional traders have the same challenges as the U.S. Air Force in making large aircraft invisible to radar. Namely, the need for stealth.

A company that buys or sells an enormous number of shares all at once runs the risk of tipping off its competitors. So, much like the Air Force trying to find a way to make a huge bomber invisible to radar, these traders must find a way to break up that big transaction into millions of easily disguised little transactions.

On the flip side, the algorithms used to break up that big event into a million little ones can also be used to find the million little pieces and put them back together again. So now we have a bunch of algorithms that are programmed to hide transactions, and a bunch of algorithms that are programmed to find them.

What could possibly go wrong with a scenario like that? Asks Slavin. Well, one thing that can go wrong is the type of event referred to as the “Flash Crash” of 2010, when 9 percent of stock market valuations simply disappeared within minutes. And to this day, nobody can agree on what exactly happened. Because nobody ordered it, or had any real control over what was happening at the time. It was all driven by algorithms, running at astonishing speeds on super-fast computers.

Today, we’re writing programs that we can no longer completely read or completely control, says Slavin. Have we lost the sense of what is actually happening in this new algorithmic world?

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