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Financial Firms Support CIFT’s Assessment of HRC Role in Market Stability

August 23, 2012

David Leinweber, DLeinweber@lbl.gov, +1 510 495 2781

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David Leinweber

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

The funds were contributed by financial firms: 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.

The Center for Innovative Financial Technologies in Berkeley Lab’s Computational Research Division was established to help build a bridge between the computational sciences and financial markets communities. CIFT was motivated in part by the 2010 Flash Crash, which was something of a wake-up call that complex markets, built on real computer networks, were capable of unanticipated and dangerous behavior.

Such a data-intensive computing challenge is similar to those addressed by Berkeley Lab’s Computing Sciences organization, which has extensive experience in using supercomputers to study large-scale problems and developing new methods to model processes and complex systems.

“There are many ways existing supercomputer computing systems are advantageous to regulation and enforcement. 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,” said CIFT Director David Leinweber. “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.”

Marcos Lopez de Prado, Head of Global Quantitative Research at the Tudor Investment Corporation, commented on their ongoing work with CIFT, “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.”

Ted Aronson, Managing Principal at AJO explained his support, “All market participants agree that market software needs to be more robust. 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. There was a story by Jason Zweig in the Wall Street Journal in May: ‘Could Computers Protect the Market from Computers?’  The answer would seem pretty obvious that nothing else can! We hope that the people building the next generation of market enforcement and regulation systems can take advantage of the opportunities here.”

Although Berkeley Lab is a Department of Energy-funded research institution, CIFT currently relies on non-government funding.