From: bgoffe@seq.uncwil.edu (Bill Goffe)
Subject: Re: Earn money trading against computer programs
Organization: Univ. of North Carolina @ Wilmington
Date: Thu, 17 Dec 1992 18:42:08 GMT


Tom Blenko writes (in response to my earlier post which he marks with |'s):
>| 
>| 
>|                             ANNOUNCING THE OPENING OF THE
>| 
>|                             ARIZONA TOKEN EXCHANGE (AZTE)
>| 
>|                                   January 1, 1993
>| 
>| Earn cash profits by competing against computerized program traders

>Aside from being one of the most ignorant propositions
>I've seen in a long time, these guys appear to be talking
>about playing with real money. And if so, it's a scam and a
>fraud. Caveat emptor! 
>
>    Tom

First off, I'm not sure why this is ignorant. There is a lot of
interest in computer based trading mechanisms. In the popular
press, see "Fidelity's Bradford Lewis Takes Aim at Indexes
With His `Neural Network' Computer Program,' _Wall Street Journal_,
Oct. 27, 1992. Or, take a look at the November 2, 1992 issue of
_Business Week_ which has a "Special Report" entitled "The New
Rocket Science; Welcome to the Future of Finance," pp. 131-40.
It strikes me as reasonable to see how well trading based on
these tools does against human traders.

Further, AZTE is similar to the Presidential Stock Market run out
of the Univ. of Iowa which studied trading (with real money)
on the outcome of the presidential election. Almost 1,000 took part 
and it predicted the election outcome more accurately than any
poll. Like the AZTE, it ran over the Internet.

The University of Arizona is well known in their study of
experimental economics. For some details, see "Experimental 
Market Economics," Vernon L. Smith and Arlington W. Williams,
_Scientific American_, December 1992, pp. 116-21. I could be
wrong, but I think this is only the third or fourth article
on an economics issue in _Scientific American_ in the last
decade or so. Also, the AZTE work is in conjunction with the 
Santa Fe Institute, which among other things has studied chaos 
and complexity theory. The institute was started in part by a 
grant from Citibank. Finally, it is my understanding that the 
AZTE has funding from the NSF. Thus, it would seem to meet 
NSFNET's acceptable use guidelines.

For more information, (espcially for academic references) 
take a look at the file azte.man from azte/docs at 
fido.econ.arizona.edu by anonymous ftp. Let me quote from the 
most germain part of this document for this discussion:

>The Santa Fe tournament [a tournament pitting computer traders
>against each other] raises some tantalizing questions:
>
> * can we reliably distinguish the behavior of program and human traders,
>   either individually or in aggregate?
>
> * how does the performance of human traders compare to the top-ranked
>   program traders from the Santa Fe tournament?
>
> * do good human traders really use simple rules of thumb, or do they
>   make much more sophisticated inferences and modify their behavior
>   in light of past trading experience?
>
> * are humans smart enough to learn to exploit the idiosyncracies of
>   program traders in repeated play, and if so, how much trading
>   experience do humans need before they are able to "catch-on"?
>
> * how consistent is human performance: do certain people have superior
>   trading ability or can virtually anyone learn to become a good trader with
>   sufficient experience?
>
>Most of the existing all-human DA experiments have focused on the
>the aggregate behavior of the DA market rather than on the performance
>and learning processes of individual traders. In order to improve
>our understanding of human trading strategies and learning dynamics
>the National Science Foundation has funded a series of experiments
>comparing the behavior of human and program traders. Our goal is to
>collect long time-series observations on individual human traders, say,
>over many hundreds of trading periods. This would be excessively costly
>undertaking in markets where all traders are human, but is feasible in a
>market where all but one of the traders are computer programs. Another
>advantage of our experimental market is that we have precise control
>over the information and feedback that we give to participants, helping
>us understand how these factors affect the learning process.

Of course, caveat emptor. But, I think I've made the case
that this isn't a fraud or scam.

For the record, my only connection with the AZTE is that I
came across it in a list read by economists and I know one of
the investigators. I thought (and still think) it might be of 
interest to the readers of misc.invest.

Bill Goffe
Dept. of Economics and Finance
Univ. of N. Carolina @ Wilmington
Wilmington, NC  28403
(919) 395-3637
bgoffe@seq.uncwil.edu