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April 2004

Robots ready to take on the markets?

Robots surpass humans in specialized, computer-designed auctions, researcher says


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by Julian Richards

In the high-finance world of trading in equities, commodities, and derivatives, software 'robot' traders working in their own computer-designed online exchange markets would be better at making a profit than human traders currently working in international exchanges, says HP Laboratories researcher Dave Cliff.

Cliff is an invited speaker at the prestigious TradeTech 2004 conference in Paris on April 28. TradeTech is the premier conference for technology in the international equity trading industry. More than 400 senior executives from leading asset managers, investment banks and technology providers are expected to attend the meeting, with many companies sending their global or regional heads of dealing.

Cliff's keynote is entitled Rise Of the Robots: Increasing Market Efficiencies By Eliminating Human Traders And Eliminating Markets Designed For Human Traders. It is based on his research at HP Labs Europe, in Bristol, UK, which showed that software traders operating in specialized, computer-designed online auction exchanges can be significantly more efficient than humans.

Potential for huge cost savings

According to Cliff, such robot traders are currently typically designed by humans, and they have to operate in online exchange market-mechanisms that were also designed by humans for humans.

Recent work by Cliff and his research colleagues has demonstrated that if these robot traders are set to work in their own virtual marketplace, automatically designed and optimized by computer to take advantage of the fact that no human traders are present, the results are even more promising.

Since the amount of money traded on the world's finance markets is so huge, even small percentage gains in efficiency made by the artificial traders in their specialized marketplaces could translate into millions or even billions of dollars a year in savings or profit.

Gains in market speed and efficiency

Recent advances in the technology of adaptive software agents mean that these sophisticated robot traders can now readily replace human traders in many real-world international markets and exchanges. But if you know that none of the traders in a market is likely to be human, you can alter the market rules and mechanisms to tailor that market to robots, rather than to humans, and this can result in the significant gains in market speed and efficiency.

Cliff leads the Complex Adaptive Systems research group at HP Labs. Before joining HP Labs in 1998, he was an associate professor at the MIT Artificial Intelligence Lab and is the author of more than 70 academic journal or conference papers and some 30 patent applications.

Interest in the finance community

In 2001, researchers from IBM demonstrated that Cliff's ZIP trading algorithm could consistently outperform human traders; and in 2002 a favorable feature article in The Economist alerted the international finance community to his pioneering work on new, high-efficiency automated market mechanisms designed by computer rather than by human professional economists.

In his keynote presentation Cliff will discuss using new automated techniques to allow computers to search automatically for, and find, the best designs for exchanges and markets, and for robot traders to work in those markets.

HP is the only major global IT hardware, solutions, and services company to be represented in the list of speakers at TradeTech2004. Other speakers include representatives from Allianz Dresdner; AXA Investment Managers; Barclays Global Investors; Citigroup; Credit Lyonnais ; Credit Suisse First Boston; Deutsche Bank; Deutsche Bourse; Euronext; Goldman Sachs Asset Management; J.P. Morgan; Liquidnet; Morgan Stanley; and Reuters.



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