August 27, 2012

The Center for Innovative Financial Technology (CIFT) at Lawrence Berkeley National Laboratory has received $100,000 in research donations to study the use of supercomputing and data intensive science to improve stability, regulation and enforcement in U.S. markets.

The funds were contributed by Tudor Investment Corporation of Greenwich CT, AJO Partners of Philadelphia, Infinium Capital Management of Chicago, and the NASDAQ/OMX Foundation, which is supporting both CIFT and an affiliated UC Berkeley computer scientist.

CIFT was established in part on the heels of the 2010 Flash Crash, which was seen as a signal that a financial system built on real computer networks posed a real threat to market stability.

“There are many ways existing supercomputer computing systems are advantageous to regulation and enforcement,” said CIFT Director David Leinweber, who is also the author of “Nerds on Wall Street: Math, Machines and Wired Markets” .

“They remove all of the data size and computation speed limits for these functions. The need for improved analysis, simulation and testing of market system integrity has been demonstrated repeatedly by a series of market mishaps. There is no algorithm certification of any sort today. In virtually all other complex systems, modeling and simulation play a central role. It’s not easy to do right, but with enough horsepower it becomes feasible to consider,” Leinweber stated in a release.

Marcos Lopez de Prado, head of global quantitative research at the Tudor Investment Corporation, commented: “Those responsible for market oversight could benefit from real-time ability to effectively monitor a complex system. Recent events, including the Flash Crash and other market disruptions, have highlighted the need to solve potential inadequacies in market structure and execution. Our research, in collaboration with CIFT, has shown that relatively simple analytics, like the HFPIN metric of order flow toxicity, can provide up to an hour’s advance warning of certain market anomalies.”

Market participants agree that market software needs to be more robust, Ted Aronson, managing principal at AJO pointed out. “We can’t tolerate the erosion of investor confidence. Bringing in the computational heavyweights to help the SROs and federal regulators broaden their collective abilities here is a valuable step.”

To support the pro-supercomputing argument, Aronson pointed to a recent Wall Street Journal article, ‘Could Computers Protect the Market from Computers?’

“The answer would seem pretty obvious that nothing else can,” he said. “We hope that the people building the next generation of market enforcement and regulation systems can take advantage of the opportunities here.”

[Read: 7 Most Striking Reasons Only 2% of Pro Investors Trust The Market.]

ABOUT THE AUTHOR
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in ...