Can Algorithms distinguish between fake and fat? Not yet

What Algos Miss That Human Traders Don’t, Usually – Fake News

Posted Saturday, December 15, 2018 by
Skerdian Meta • 3 min read

We have heard the phrase “fake news” quite often recently. I don’t know when and where it started, but Donald Trump made it popular. Both sides used it during the US elections, with Trump referring to his opponent media as fake news, and the Democrats referring to presumed Russian intervention in the US elections as fake news. Now, everyone is using it now.

But, where fake news matters most is in the financial markets. Important fundamental events have major impact in the forex market as well as in other financial markets. Political events such as Brexit, the US elections or the row between the EU and Italy regarding the Italian budget deficit have shifted the market sentiment and we have seen some major moves in the following days, weeks, and even months and years as is the case with Brexit.

These are not fake news. But what if a major player in forex or a group of traders decide to use fake news to manipulate the market around in their favour? Not that this hasn’t happened either. We have heard rumours of family members of central bank officials making trades before an announcement from the central bank of a certain country which has moved markets greatly. While it might not exactly be fake news, it has a similar effect. Because if a central banker says that they will start rising interest rates soon which pops up the currency, or that they will intervene as in the case of the Swiss Bank which usually sells the CHF by buying EUR/CHF and then they don’t follow up with action, then that is fake news to some degree.

But, it is about to get much worse, especially for algorithmic trading. We know that many large firms use algos to trade technicals as well as fundamentals such as news releases and headlines from economists, analysts, politicians and central bankers. These algorithmic trading systems rely on speed to deliver results. They read news and data releases and the competition of the last 10-15 years has made their reaction speed to these events extraordinary.

But what if the news is fake? What if we as a forex website team up with other important forex websites and post a bunch of fake/distorted news/analysis about a financial asset? Let’s say, we sell GBP/USD and we all post a bunch of articles together that the UK will end up with no Brexit deal at all after leaving the EU within a few minutes of each other.

Algos will surely pick that up and make a big trade on it. The GBP will fall a few cents immediately and even if the rumours prove to be untrue, that will set the sentiment for the days to come for GBP pairs. Or we can buy GBP/USD after the move has happened and the dust has settled, but before anyone realizes that it was fake news, which means making money both ways just on some market moves that we as a group produced.

Marko Kolanovic who is one of the earliest algo/quant professionals on Wall Street and the global head of derivatives and quantitative strategy at JP Morgan is worried about it. He said that “what if someone is creating fake tweets to hurt your strategy, are you allowed to defend yourself by throwing off that algorithm? Where’s the limit of market manipulation vs. defense?”.

Bloomberg also had a few lines in an article with regards to growing algo trading. They say that with the increase in computers, electronic market-making, and growth in passive and quantitative assets, computers and AI will have a bigger role in ­market-making. At some point that’s going to end up badly, most likely when the next recession hits.

But while human traders are not immune to fake news, we can read between the lines or compare information in different websites. We can also react quickly if we see that the information is not correct since we have brains. Algos can’t really tell apart which news is fake/corrupted and which is true.

So, this is going to be a battle between humans and algos and it will continue to grow, until it all goes crashing at the next recession as Bloomberg predicts. One thing that we cannot. This is one of the few major battles that human traders have the upper hand on and might end up winning in the long run, but let’s wait for the next recession as Bloomers says. I hope it is nowhere as bad as the one we went through in the last decade.

Check out our free forex signals
Follow the top economic events on FX Leaders economic calendar
Trade better, discover more Forex Trading Strategies
Related Articles
0 0 vote
Article Rating
Notify of
Inline Feedbacks
View all comments