Malignant Acceleration in Tech-Finance. Some Further Rumination on Regulations. Thought of the Day 72.1


Regardless of the positive effects of HFT that offers, such as reduced spreads, higher liquidity, and faster price discovery, its negative side is mostly what has caught people’s attention. Several notorious market failures and accidents in recent years all seem to be related to HFT practices. They showed how much risk HFT can involve and how huge the damage can be.

HFT heavily depends on the reliability of the trading algorithms that generate, route, and execute orders. High-frequency traders thus must ensure that these algorithms have been tested completely and thoroughly before they are deployed into the live systems of the financial markets. Any improperly-tested, or prematurely-released algorithms may cause losses to both investors and the exchanges. Several examples demonstrate the extent of the ever-present vulnerabilities.

In August 2012, the Knight Capital Group implemented a new liquidity testing software routine into its trading system, which was running live on the NYSE. The system started making bizarre trading decisions, quadrupling the price of one company, Wizzard Software, as well as bidding-up the price of much larger entities, such as General Electric. Within 45 minutes, the company lost USD 440 million. After this event and the weakening of Knight Capital’s capital base, it agreed to merge with another algorithmic trading firm, Getco, which is the biggest HFT firm in the U.S. today. This example emphasizes the importance of implementing precautions to ensure their algorithms are not mistakenly used.

Another example is Everbright Securities in China. In 2013, state-owned brokerage firm, Everbright Securities Co., sent more than 26,000 mistaken buy orders to the Shanghai Stock Exchange (SSE of RMB 23.4 billion (USD 3.82 billion), pushing its benchmark index up 6 % in two minutes. This resulted in a trading loss of approximately RMB 194 million (USD 31.7 million). In a follow-up evaluative study, the China Securities Regulatory Commission (CSRC) found that there were significant flaws in Everbright’s information and risk management systems.

The damage caused by HFT errors is not limited to specific trading firms themselves, but also may involve stock exchanges and the stability of the related financial market. On Friday, May 18, 2012, the social network giant, Facebook’s stock was issued on the NASDAQ exchange. This was the most anticipated initial public offering (IPO) in its history. However, technology problems with the opening made a mess of the IPO. It attracted HFT traders, and very large order flows were expected, and before the IPO, NASDAQ was confident in its ability to deal with the high volume of orders.

But when the deluge of orders to buy, sell and cancel trades came, NASDAQ’s trading software began to fail under the strain. This resulted in a 30-minute delay on NASDAQ’s side, and a 17-second blackout for all stock trading at the exchange, causing further panic. Scrutiny of the problems immediately led to fines for the exchange and accusations that HFT traders bore some responsibility too. Problems persisted after opening, with many customer orders from institutional and retail buyers unfilled for hours or never filled at all, while others ended up buying more shares than they had intended. This incredible gaffe, which some estimates say cost traders USD 100 million, eclipsed NASDAQ’s achievement in getting Facebook’s initial IPO, the third largest IPO in U.S. history. This incident has been estimated to have cost investors USD 100 million.

Another instance occurred on May 6, 2010, when U.S. financial markets were surprised by what has been referred to ever since as the “Flash Crash” Within less than 30 minutes, the main U.S. stock markets experienced the single largest price declines within a day, with a decline of more than 5 % for many U.S.-based equity products. In addition, the Dow Jones Industrial Average (DJIA), at its lowest point that day, fell by nearly 1,000 points, although it was followed by a rapid rebound. This brief period of extreme intraday volatility demonstrated the weakness of the structure and stability of U.S. financial markets, as well as the opportunities for volatility-focused HFT traders. Although a subsequent investigation by the SEC cleared high-frequency traders of directly having caused the Flash Crash, they were still blamed for exaggerating market volatility, withdrawing liquidity for many U.S.-based equities (FLASH BOYS).

Since the mid-2000s, the average trade size in the U.S. stock market had plummeted, the markets had fragmented, and the gap in time between the public view of the markets and the view of high-frequency traders had widened. The rise of high-frequency trading had been accompanied also by a rise in stock market volatility – over and above the turmoil caused by the 2008 financial crisis. The price volatility within each trading day in the U.S. stock market between 2010 and 2013 was nearly 40 percent higher than the volatility between 2004 and 2006, for instance. There were days in 2011 in which volatility was higher than in the most volatile days of the dot-com bubble. Although these different incidents have different causes, the effects were similar and some common conclusions can be drawn. The presence of algorithmic trading and HFT in the financial markets exacerbates the adverse impacts of trading-related mistakes. It may lead to extremely higher market volatility and surprises about suddenly-diminished liquidity. This raises concerns about the stability and health of the financial markets for regulators. With the continuous and fast development of HFT, larger and larger shares of equity trades were created in the U.S. financial markets. Also, there was mounting evidence of disturbed market stability and caused significant financial losses due to HFT-related errors. This led the regulators to increase their attention and effort to provide the exchanges and traders with guidance on HFT practices They also expressed concerns about high-frequency traders extracting profit at the costs of traditional investors and even manipulating the market. For instance, high-frequency traders can generate a large amount of orders within microseconds to exacerbate a trend. Other types of misconduct include: ping orders, which is using some orders to detect other hidden orders; and quote stuffing, which is issuing a large number of orders to create uncertainty in the market. HFT creates room for these kinds of market abuses, and its blazing speed and huge trade volumes make their detection difficult for regulators. Regulators have taken steps to increase their regulatory authority over HFT activities. Some of the problems that arose in the mid-2000s led to regulatory hearings in the United States Senate on dark pools, flash orders and HFT practices. Another example occurred after the Facebook IPO problem. This led the SEC to call for a limit up-limit down mechanism at the exchanges to prevent trades in individual securities from occurring outside of a specified price range so that market volatility will be under better control. These regulatory actions put stricter requirements on HFT practices, aiming to minimize the market disturbance when many fast trading orders occur within a day.

Regulating the Velocities of Dark Pools. Thought of the Day 72.0


On 22 September 2010 the SEC chair Mary Schapiro signaled US authorities were considering the introduction of regulations targeted at HFT:

…High frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility.

However regulating an industry working towards moving as fast as the speed of light is no ordinary administrative task: – Modern finance is undergoing a fundamental transformation. Artificial intelligence, mathematical models, and supercomputers have replaced human intelligence, human deliberation, and human execution…. Modern finance is becoming cyborg finance – an industry that is faster, larger, more complex, more global, more interconnected, and less human. C W Lin proposes a number of principles for regulating this cyber finance industry:

  1. Update antiquated paradigms of reasonable investors and compartmentalised institutions, and confront the emerging institutional realities, and realise the old paradigms of governance of markets may be ill-suited for the new finance industry;
  2. Enhance disclosure which recognises the complexity and technological capacities of the new finance industry;
  3. Adopt regulations to moderate the velocities of finance realising that as these approach the speed of light they may contain more risks than rewards for the new financial industry;
  4. Introduce smarter coordination harmonising financial regulation beyond traditional spaces of jurisdiction.

Electronic markets will require international coordination, surveillance and regulation. The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment… Moreover, issues related to risk management of these technology-dependent trading systems are numerous and complex and cannot be addressed in isolation within domestic financial markets. For example, placing limits on high-frequency algorithmic trading or restricting Un-filtered sponsored access and co-location within one jurisdiction might only drive trading firms to another jurisdiction where controls are less stringent.

In these regulatory endeavours it will be vital to remember that all innovation is not intrinsically good and might be inherently dangerous, and the objective is to make a more efficient and equitable financial system, not simply a faster system: Despite its fast computers and credit derivatives, the current financial system does not seem better at transferring funds from savers to borrowers than the financial system of 1910. Furthermore as Thomas Piketty‘s Capital in the Twenty-First Century amply demonstrates any thought of the democratisation of finance induced by the huge expansion of superannuation funds together with the increased access to finance afforded by credit cards and ATM machines, is something of a fantasy, since levels of structural inequality have endured through these technological transformations. The tragedy is that under the guise of technological advance and sophistication we could be destroying the capacity of financial markets to fulfil their essential purpose, as Haldane eloquently states:

An efficient capital market transfers savings today into investment tomorrow and growth the day after. In that way, it boosts welfare. Short-termism in capital markets could interrupt this transfer. If promised returns the day after tomorrow fail to induce saving today, there will be no investment tomorrow. If so, long-term growth and welfare would be the casualty.

Quantum Informational Biochemistry. Thought of the Day 71.0


A natural extension of the information-theoretic Darwinian approach for biological systems is obtained taking into account that biological systems are constituted in their fundamental level by physical systems. Therefore it is through the interaction among physical elementary systems that the biological level is reached after increasing several orders of magnitude the size of the system and only for certain associations of molecules – biochemistry.

In particular, this viewpoint lies in the foundation of the “quantum brain” project established by Hameroff and Penrose (Shadows of the Mind). They tried to lift quantum physical processes associated with microsystems composing the brain to the level of consciousness. Microtubulas were considered as the basic quantum information processors. This project as well the general project of reduction of biology to quantum physics has its strong and weak sides. One of the main problems is that decoherence should quickly wash out the quantum features such as superposition and entanglement. (Hameroff and Penrose would disagree with this statement. They try to develop models of hot and macroscopic brain preserving quantum features of its elementary micro-components.)

However, even if we assume that microscopic quantum physical behavior disappears with increasing size and number of atoms due to decoherence, it seems that the basic quantum features of information processing can survive in macroscopic biological systems (operating on temporal and spatial scales which are essentially different from the scales of the quantum micro-world). The associated information processor for the mesoscopic or macroscopic biological system would be a network of increasing complexity formed by the elementary probabilistic classical Turing machines of the constituents. Such composed network of processors can exhibit special behavioral signatures which are similar to quantum ones. We call such biological systems quantum-like. In the series of works Asano and others (Quantum Adaptivity in Biology From Genetics to Cognition), there was developed an advanced formalism for modeling of behavior of quantum-like systems based on theory of open quantum systems and more general theory of adaptive quantum systems. This formalism is known as quantum bioinformatics.

The present quantum-like model of biological behavior is of the operational type (as well as the standard quantum mechanical model endowed with the Copenhagen interpretation). It cannot explain physical and biological processes behind the quantum-like information processing. Clarification of the origin of quantum-like biological behavior is related, in particular, to understanding of the nature of entanglement and its role in the process of interaction and cooperation in physical and biological systems. Qualitatively the information-theoretic Darwinian approach supplies an interesting possibility of explaining the generation of quantum-like information processors in biological systems. Hence, it can serve as the bio-physical background for quantum bioinformatics. There is an intriguing point in the fact that if the information-theoretic Darwinian approach is right, then it would be possible to produce quantum information from optimal flows of past, present and anticipated classical information in any classical information processor endowed with a complex enough program. Thus the unified evolutionary theory would supply a physical basis to Quantum Information Biology.

Highest Reality. Thought of the Day 70.0


यावचिन्त्यावात्मास्य शक्तिश्चैतौ परमार्थो भवतः॥१॥

Yāvacintyāvātmāsya śaktiścaitau paramārtho bhavataḥ

These two (etau), the Self (ātmā) and (ca) His (asya) Power (śaktiḥ) —who (yau) (are) inconceivable (acintyau)—, constitute (bhavataḥ) the Highest Reality (parama-arthaḥ)

The Self is the Core of all, and His Power has become all. I call the Core “the Self” for the sake of bringing more light instead of more darkness. If I had called Him “Śiva”, some people might consider Him as the well-known puranic Śiva who is a great ascetic living in a cave and whose main task consists in destroying the universe, etc. Other people would think that, as Viṣṇu is greater than Śiva, he should be the Core of all and not Śiva. In turn, there is also a tendency to regard Śiva like impersonal while Viṣṇu is personal. There is no end to spiritual foolishness indeed, because there is no difference between Śiva and Viṣṇu really. Anyway, other people could suggest that a better name would be Brahman, etc. In order not to fall into all that ignorant mess of names and viewpoints, I chose to assign the name “Self” to the Core of all. In the end, when spiritual enlightenment arrives, one’s own mind is withdrawn (as I will tell by an aphorism later on), and consequently there is nobody to think about if “This Core of all” is personal, impersonal, Śiva, Viṣṇu, Brahman, etc. Ego just collapses and This that remains is the Self as He essentially is.

He and His Power are completely inconceivable, i.e. beyond the mental sphere. The Play of names, viewpoints and such is performed by His Power, which is always so frisky. All in all, the constant question is always: “Is oneself completely free like the Self?”. If the answer is “Yes”, one has accomplished the goal of life. And if the answer is “No”, one must get rid of his own bondage somehow then. The Self and His Power constitute the Highest Reality. Once you can attain them, so to speak, you are completely free like Them both. The Self and His Power are “two” only in the sphere of words, because as a matter of fact they form one compact mass of Absolute Freedom and Bliss. Just as the sun can be divided into “core of the sun, surface of the sun, crown”, etc.

तयोरुभयोः स्वरूपं स्वातन्त्र्यानन्दात्मकैकघनत्वेनापि तत्सन्तताध्ययनाय वचोविषय एव द्विधाकृतम्

Tayorubhayoḥ svarūpaṁ svātantryānandātmakaikaghanatvenāpi tatsantatādhyayanāya vacoviṣaya eva dvidhākṛtam

Even though (api) the essential nature (sva-rūpam) of Them (tayoḥ) both (ubhayoḥ) (is) one compact mass (eka-ghanatvena) composed of (ātmaka) Absolute Freedom (svātantrya)(and) Bliss (ānanda), it is divided into two (dvidhā-kṛtam) —only (eva) in the sphere (viṣaye) of words (vacas)— for its close study (tad-santata-adhyayanāya)

The Self is Absolute Freedom and His Power is Bliss. Both form a compact mass (i.e. omnipresent). In other words, the Highest Reality is always “One without a second”, but, in the world of words It is divided into two for studying It in detail. When this division occurs, the act of coming to recognize or realize the Highest Reality is made easier. So, the very Highest Reality generates this division in the sphere of words as a help for the spiritual aspirants to realize It faster.

आत्मा प्रकाशात्मकशुद्धबोधोऽपि सोऽहमिति वचोविषये स्मृतः

Ātmā prakāśātmakaśuddhabodho’pi so’hamiti vacoviṣaye smṛtaḥ

Although (api) the Self (ātmā) (is) pure (śuddha) Consciousness (bodhaḥ) consisting of (ātmaka) Prakāśa or Light (prakāśa), He (saḥ) is called (smṛtaḥ) “I” (aham iti) in the sphere (viṣaye) of words (vacas)

The Self is pure Consciousness, viz. the Supreme Subject who is never an object. Therefore, He cannot be perceived in the form of “this” or “that”. He cannot even be delineated in thought by any means. Anyway, in the world of words, He is called “I” or also “real I” for the sake of showing that He is higher than the false “I” or ego.

Belief Networks “Acyclicity”. Thought of the Day 69.0

Belief networks are used to model uncertainty in a domain. The term “belief networks” encompasses a whole range of different but related techniques which deal with reasoning under uncertainty. Both quantitative (mainly using Bayesian probabilistic methods) and qualitative techniques are used. Influence diagrams are an extension to belief networks; they are used when working with decision making. Belief networks are used to develop knowledge based applications in domains which are characterised by inherent uncertainty. Increasingly, belief network techniques are being employed to deliver advanced knowledge based systems to solve real world problems. Belief networks are particularly useful for diagnostic applications and have been used in many deployed systems. The free-text help facility in the Microsoft Office product employs Bayesian belief network technology. Within a belief network the belief of each node (the node’s conditional probability) is calculated based on observed evidence. Various methods have been developed for evaluating node beliefs and for performing probabilistic inference. Influence diagrams, which are an extension of belief networks, provide facilities for structuring the goals of the diagnosis and for ascertaining the value (the influence) that given information will have when determining a diagnosis. In influence diagrams, there are three types of node: chance nodes, which correspond to the nodes in Bayesian belief networks; utility nodes, which represent the utilities of decisions; and decision nodes, which represent decisions which can be taken to influence the state of the world. Influence diagrams are useful in real world applications where there is often a cost, both in terms of time and money, in obtaining information.

The basic idea in belief networks is that the problem domain is modelled as a set of nodes interconnected with arcs to form a directed acyclic graph. Each node represents a random variable, or uncertain quantity, which can take two or more possible values. The arcs signify the existence of direct influences between the linked variables, and the strength of each influence is quantified by a forward conditional probability.

The Belief Network, which is also called the Bayesian Network, is a directed acyclic graph for probabilistic reasoning. It defines the conditional dependencies of the model by associating each node X with a conditional probability P(X|Pa(X)), where Pa(X) denotes the parents of X. Here are two of its conditional independence properties:

1. Each node is conditionally independent of its non-descendants given its parents.

2. Each node is conditionally independent of all other nodes given its Markov blanket, which consists of its parents, children, and children’s parents.

The inference of Belief Network is to compute the posterior probability distribution

P(H|V) = P(H,V)/ ∑HP(H,V)

where H is the set of the query variables, and V is the set of the evidence variables. Approximate inference involves sampling to compute posteriors. The Sigmoid Belief Network is a type of the Belief Network such that

P(Xi = 1|Pa(Xi)) = σ( ∑Xj ∈ Pa(Xi) WjiXj + bi)

where Wji is the weight assigned to the edge from Xj to Xi, and σ is the sigmoid function.


Rants of the Undead God: Instrumentalism. Thought of the Day 68.1


Hilbert’s program has often been interpreted as an instrumentalist account of mathematics. This reading relies on the distinction Hilbert makes between the finitary part of mathematics and the non-finitary rest which is in need of grounding (via finitary meta-mathematics). The finitary part Hilbert calls “contentual,” i.e., its propositions and proofs have content. The infinitary part, on the other hand, is “not meaningful from a finitary point of view.” This distinction corresponds to a distinction between formulas of the axiomatic systems of mathematics for which consistency proofs are being sought. Some of the formulas correspond to contentual, finitary propositions: they are the “real” formulas. The rest are called “ideal.” They are added to the real part of our mathematical theories in order to preserve classical inferences such as the principle of the excluded middle for infinite totalities, i.e., the principle that either all numbers have a given property or there is a number which does not have it.

It is the extension of the real part of the theory by the ideal, infinitary part that is in need of justification by a consistency proof – for there is a condition, a single but absolutely necessary one, to which the use of the method of ideal elements is subject, and that is the proof of consistency; for, extension by the addition of ideals is legitimate only if no contradiction is thereby brought about in the old, narrower domain, that is, if the relations that result for the old objects whenever the ideal objects are eliminated are valid in the old domain. Weyl described Hilbert’s project as replacing meaningful mathematics by a meaningless game of formulas. He noted that Hilbert wanted to “secure not truth, but the consistency of analysis” and suggested a criticism that echoes an earlier one by Frege – why should we take consistency of a formal system of mathematics as a reason to believe in the truth of the pre-formal mathematics it codifies? Is Hilbert’s meaningless inventory of formulas not just “the bloodless ghost of analysis? Weyl suggested that if mathematics is to remain a serious cultural concern, then some sense must be attached to Hilbert’s game of formulae. In theoretical physics we have before us the great example of a [kind of] knowledge of completely different character than the common or phenomenal knowledge that expresses purely what is given in intuition. While in this case every judgment has its own sense that is completely realizable within intuition, this is by no means the case for the statements of theoretical physics. Hilbert suggested that consistency is not the only virtue ideal mathematics has –  transfinite inference simplifies and abbreviates proofs, brevity and economy of thought are the raison d’être of existence proofs.

Hilbert’s treatment of philosophical questions is not meant as a kind of instrumentalist agnosticism about existence and truth and so forth. On the contrary, it is meant to provide a non-skeptical and positive solution to such problems, a solution couched in cognitively accessible terms. And, it appears, the same solution holds for both mathematical and physical theories. Once new concepts or “ideal elements” or new theoretical terms have been accepted, then they exist in the sense in which any theoretical entities exist. When Weyl eventually turned away from intuitionism, he emphasized the purpose of Hilbert’s proof theory, not to turn mathematics into a meaningless game of symbols, but to turn it into a theoretical science which codifies scientific (mathematical) practice. The reading of Hilbert as an instrumentalist goes hand in hand with a reading of the proof-theoretic program as a reductionist project. The instrumentalist reading interprets ideal mathematics as a meaningless formalism, which simplifies and “rounds out” mathematical reasoning. But a consistency proof of ideal mathematics by itself does not explain what ideal mathematics is an instrument for.

On this picture, classical mathematics is to be formalized in a system which includes formalizations of all the directly verifiable (by calculation) propositions of contentual finite number theory. The consistency proof should show that all real propositions which can be proved by ideal methods are true, i.e., can be directly verified by finite calculation. Actual proofs such as the ε-substitution procedure are of such a kind: they provide finitary procedures which eliminate transfinite elements from proofs of real statements. In particular, they turn putative ideal derivations of 0 = 1 into derivations in the real part of the theory; the impossibility of such a derivation establishes consistency of the theory. Indeed, Hilbert saw that something stronger is true: not only does a consistency proof establish truth of real formulas provable by ideal methods, but it yields finitary proofs of finitary general propositions if the corresponding free-variable formula is derivable by ideal methods.

Epistemological Constraints to Finitism. Thought of the Day 68.0


Hilbert’s substantial philosophical claims about the finitary standpoint are difficult to flesh out. For instance, Hilbert appeals to the role of Kantian intuition for our apprehension of finitary objects (they are given in the faculty of representation). Supposing one accepts this line of epistemic justification in principle, it is plausible that the simplest examples of finitary objects and propositions, and perhaps even simple cases of finitary operations such as concatenations of numerals can be given a satisfactory account.

Of crucial importance to both an understanding of finitism and of Hilbert’s proof theory is the question of what operations and what principles of proof should be allowed from the finitist standpoint. That a general answer is necessary is clear from the demands of Hilbert’s proof theory, i.e., it is not to be expected that given a formal system of mathematics (or even a single sequence of formulas) one can “see” that it is consistent (or that it cannot be a genuine derivation of an inconsistency) the way we can see, e.g., that || + ||| = ||| + ||. What is required for a consistency proof is an operation which, given a formal derivation, transforms such a derivation into one of a special form, plus proofs that the operation in fact succeeds in every case and that proofs of the special kind cannot be proofs of an inconsistency.

Hilbert said that intuitive thought “includes recursion and intuitive induction for finite existing totalities.” All of this in its application in the domain of numbers, can be formalized in a system known as primitive recursive arithmetic (PRA), which allows definitions of functions by primitive recursion and induction on quantifier-free formulas. However, Hilbert never claimed that only primitive recursive operations count as finitary. Although Hilbert and his collaborators used methods which go beyond the primitive recursive and accepted them as finitary, it is still unclear whether they (a) realized that these methods were not primitive recursive and (b) whether they would still have accepted them as finitary if they had. The conceptual issue is which operations should be considered as finitary. Since Hilbert was less than completely clear on what the finitary standpoint consists in, there is some leeway in setting up the constraints, epistemological and otherwise, an analysis of finitist operation and proof must fulfill. Hilbert characterized the objects of finitary number theory as “intuitively given,” as “surveyable in all their parts,” and said that their having basic properties must “exist intuitively” for us. This characterization of finitism as primarily to do with intuition and intuitive knowledge has been emphasized in that what can count as finitary on this understanding is not more than those arithmetical operations that can be defined from addition and multiplication using bounded recursion.

Rejecting the aspect of representability in intuition as the hallmark of the finitary; one could take finitary reasoning to be “a minimal kind of reasoning supposed by all non-trivial mathematical reasoning about numbers” and analyze finitary operations and methods of proof as those that are implicit in the very notion of number as the form of a finite sequence. This analysis of finitism is supported by Hilbert’s contention that finitary reasoning is a precondition for logical and mathematical, indeed, any scientific thinking.