Predicting the Future: For Money or Marketing?

August 22, 2022

A few days ago I was talking with some individuals who want to rely of predictive methods. These individuals had examples of 90 percent accuracy. Among the factoids offered were matching persons of interest with known bad actors, identifying CSAM in photographs, and predicting where an event would occur. Yep, 90 percent.

I did not mention counter examples.

A few moments ago, I emailed a link to the article titled “High-Frequency Trading Firms Can Easily Get to 64% Accuracy in Predicting Direction of the Next Trade, Princeton Study Finds.” The article states:

In its IPO filing in 2014, Virtu Financial said it had exactly one day of trading losses in 1,238 days. That kind of consistent profitability seems to be still the case: a new study from a team at Princeton University found that predictability in high frequency trading returns and durations is “large, systemic and pervasive”. They focused on the period from Jan. 2019 to Dec. 2020, which includes the turmoil when the coronavirus pandemic first hit the western world. With what they said was minimal algorithmic tuning, they can get to 64% accuracy for predicting the direction of the next trade over the next five seconds.

How accurate can the system referenced become? I noted this statement:

The Princeton researchers also simulated the effect that acquiring some signal on the direction of the order flow would have for the accuracy of the predictions. The idea is that knowledge could be gained by looking at order flow at different exchanges. That would boost the return predictability from 14% to 27%, and price direction accuracy from 68% to 79%.

Encouraging? Yes. A special case? Yes.

Flip the data to losses:

  1. The fail rate is 36 percent for the 2014 data
  2. The fail rate achieved by processing data from multiple source was  21 percent.

But 90 percent? Not yet.

What happens if one tries to use synthetic data to predict what an individual in a statistically defined cluster wants?

Yeah. Not there yet with amped up Bayesian methods and marketing collateral. Have these Princeton researchers linked with a high frequency trading outfit yet? Good PR generates opportunities in my experience.

Stephen E Arnold, August 22, 2022


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