Friday, July 20, 2012

The Fear Index: VIXAL-Infinity

I am currently reading "The Fear Index" by Robert Harris - at this moment I am about half-way through. Before I finish it though I think I would like to briefly blog a bit about the content of this book and how it may in fact be "reality masked as fiction". The central character is Dr. Alex Hoffman, one of the word's leading AI researchers and create of "VIXAL-4", the. 4th version of "VIXAL" which is a concatenation of VIX (Volatility Index) and AL(gorithm). Vixal 4 is a state-of-the-art high frequency trading and derivative swapping AI software run on a multi-threaded, multi-cored server system in Switzerland which was created when Dr. Hoffman decided to abandon his research at CERN to promote and advance AI research by applying it to the derivatives market.

What I am finding so interesting about this novel is that it all seems to be a rather plausible story thus far, and I can only imagine, based on current available evidence, that AI machines are in fact running our entire global economy. A good example of this can be found here:

and here:

According to the book the purpose of these VIXAL-4 is in fact to both sense and even trigger the human emotion of fear. At one point in the book Dr. Hoffman proclaims that "fear is what is driving the modern global economy" (and therefore his firm should exploit this to their own benefit). I couldn't agree more with Dr. Hoffman. It seems that algorithmic trading has eliminated the need for human econometric analysis altogether. The machines themselves only need to create volatility by triggering massive sell-offs from highly leveraged positions they hold by virtue of being "preferred clients" of central bank money printing schemes and "presto", "voila" you have a stock and derivatives swap market being entirely "pumped and dumped" in cycles of days to hours to minutes to seconds depending on which frequency level you are trading. This can generate massive revenue without the public's knowledge, literally stripping away wealth from other longer term "buy and hold" positions (i.e. the common investor) who just think they are getting their orders filled at a fair market price as well as put and option purchasers who aren't aware that the system is rigged by machines. I think I've come to figure out how many of these schemes work but basically its all being drive from the VIX index:

Basically how it works is these algorithms are able to filter information far faster than any human can and detect sudden changes in market news and financial matters in milliseconds and turn it into an actionable order to be filled. The idea in the book is to trace these events to future volatility which then becomes the prime indicator of panic and hence opportunism within the market - traders love volatility. Furthermore when they are not subject to any regulations they are able to "naked short sell" a stock or commodity into oblivion thus creating the volatility themselves - all the common investors with their "stop loss" orders can do is react to this (irrationally) by selling which creates a massive panic and triggers further collapse in its price - just the volatility needed for a put option scheme on the underlying stock or asset or simply shorting the stock itself. Then the very same bank, having been given a giant line of essentially endless credit from the government from no interest loans (with a bailout guarantee to boot!) can buy up hordes of that stock once the volatility returns to normal again and drive the price right back up again. This can be done very quickly, on a variety of time scales (days, hours, minutes, seconds) and thus the ability to respond quickly to the volatility (i.e. make quick entry and exit) is essential to making a sure profit.

Does VIXAL-4 already exist? My gut tells me it does which also means, as Max Keiser recently suggested on his talk show, that our entire financial psyche is "occupied" by AI. In other words, the machines are running us and the most corrupted of us are the ones most likely doing the machine's bidding....


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