An AI Hedge Fund Is Trying To Make Wall Street More Open Source

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An AI Hedge Fund Is Trying To Make Wall Street More Open Source

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The software wants to reshape the way we trade digital currency, one that promotes collaboration rather than individual gains

You probably remember when Bitcoin was first invented in 2009 as a digital currency that requires no banks, no transaction fees, and totally anonymous merchandising. It’s purchased and sold on online marketplaces, allowing Bitcoins to retain a monetary value, and use encryption techniques to regulate how units are generated and transferred to recipients. It operates independently of a central bank and mints, but it’s still recognized as a viable source of monetary compensation in many spheres. More and more organizations are accepting the use of Bitcoins as currency. This digital currency may seem a little unorthodox, but the usefulness of the invention is clear, as is the potential for growing online transactions. For that reason, it shouldn’t be much of a surprise that a South African technologist named Richard Craib began using his artificial intelligence hedge fund Numerai to issue a brand new digital currency that works for traders on Wall Street.

At 29 years old, Craib used the same tech that inspired Bitcoin to create a crypto-finance unit called ‘digital tokens.’ It builds up internet-based assets that can be used to trade and gain interest just like you’d do on Wall Street. It’s particularly good for crowdsourcing, encouraging people to work together online to build individual and group wealth.

As of now, the digital tokens only work through the existing hedge fund. Numerai chooses all the trades based on several thousand algorithms that have been submitted by anonymous data scientists. Each algorithm competes to create the most advanced trading algorithm with digital tokens as a reward for their success.

According to a cover article on Wired, Numerai’s digitally powered trade is quite elegant and complex. The system is designed so that data scientists can’t cheat or try to get too far ahead of other individual participants. It’s based around a design to promote trade rather than individual gain.

“Numerai encrypts its trading data before sharing it with the data scientists to prevent them from mimicking the fund’s trades themselves,” the Wired article reports. “At the same time, the company carefully organizes this encrypted data in a way that allows the data scientists to build models that are potentially able to make better trades.”

This has been going on quite successfully for more than a year, and it’s even managed to attract Howard Morgan, founder of Renaissance Technologies, and other marquee backers ensconced in tech-powered trading.

Craib began this affair when he noticed serious drawbacks in the way trades take place. As a hedge fund manager, he saw first-hand the back-stabbing methods of getting to the top with no regard for success in the hedge fund as a whole. This manner of participation isn’t good for the performance of individual trades or the success of the hedge fund.

Before Craib started his digital tokens, individual competition ruled. As the best scientists won, they had little incentive to bring in more talent that could benefit the system and get it to steadily grow. If successful data scientists were to spread the word about what Numerai was doing for them, they would only add to the competition that was already chipping away at their winnings.

Craib wanted to see the platform boost group wealth and is hopeful that a focus on using the digital tokens for crowdsourcing venture capital and similar endeavors would make it more of a collaboration rather than a competition. If it’s successful, we’ll be looking at more of an open-source trading platform rather than a closed, exclusive venture that only the elite can benefit from.

To try to beat the competitive edge that this hedge fund once had, Numerai gave out a million tokens called Numeraire to 12,000 scientists. This system is still competition based, but the incentives are a little different. The better their software trades perform, the more currency they rake in. They’ll receive more of these digital tokens as well as some bitcoin that can be used for real compensation. If their transactions fail, they lose their digital tokens, and they don’t receive any digital funding.

It makes it so that participants can’t virtually cheat the system. They have to build models that will perform well in the real trade, not just in their preliminary test. It requires that people work together and spread the word. The more talent that’s incorporated into the trade platform, the better people will do with their online trades.

Craib hopes that this open-source platform will change the way that greed runs our society. Rather than focusing on building individual wealth, traders will have a stronger focus on boosting the economy as a whole and helping organizations to stay afloat in a difficult market. It will help to boost artificial intelligence acceptance and performance in the market.

In all, Craib says that his method of focusing on the tech rather than on the money will make all the difference. “Why is tech positive-sum and finance zero-sum?” Craib asks.

It’s still a little early to determine whether or not this technology and open source trading platform will do all the Craib hopes it can do. It’s also hard to tell if it will have applications beyond the Numeraire platform.

If it has the effect Craib wants, it will teach Wall Street trading to take more of an open source approach. In a software company, collaboration is the food on which it grows. Individual investments don’t do enough to build it up, and the company becomes unstable as a result. Organizations grow better when there’s collaboration, and if people on Wall Street could learn to work better together, the stock market would be a much stronger beast.

Additionally, this platform could open more doors toward online trading. This use of positive reinforcement makes trading on a mass scale more accessible to individuals and organizations of all sizes rather than just the elite. Those with talent and ingenuity can make their way in the trading world. They don’t necessarily need a lot of initial capital to find success.

Time will tell whether or not the Numeraire way of trading will catch on the way Bitcoin did, but if it does, we’ll see some potentially promising changes in the way Wall Street does business.

Numerai | Numeraire

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February 28, 2017 at 02:53AM