Posted by: zyxo | December 30, 2007

Do Stock Traders show Swarm Intelligence ?

In a blog at a trader compared the swarm intelligence of e.g. ants to the behaviour of a swarm of traders.
Well, are traders “swarming” ?

Swarming, no, and intelligence ? Certainly not. Is the fact that stock prices move, in seemingly no logical direction, but in reaction to lots of peoples behaviour any sign of intelligence. I suppose no ! What is the benefit for the swarm ? There is benefit for some traders but there is an equal amount of loss for the others. Consequently the sum of the benefits is zero, nada, nil, noppes, nul de botten, rien du tout. With such intelligence no ant swarm would survive till the next day !
Moreover, traders are not swarming. They just act independently with no mutual interaction whatsoever. Well there is a sort of interaction, as they respond to the result of their trading behaviour on the stock price. And there is even another sort of interaction, namely the blog and spam messages about stocks that are going to boom and which you should certainly buy (not saying they bought them already and if you follow their advice they will be the first to sell and leave you with the losses). But that is not the behaviour of a swarm, but of a unconnected collection of selfish individual hunters who know there is a lot of competition.


  1. I’ve seen swarms in the commodities arena for over three decades. People will swarm onto a trend, or at a key price, just like ants on a dung pile. People that exhibit characteristics of swarming usually are newbies, undercapitalized, inexperienced, and just plain fools. We used to get them to swarm, then offer some huge volume to get the swarm to bail, en-masse. We’d always fade the swarmers, as the swarmers are not net profitible in the markets.

    I see evidence of swaming after Jim Cramer touts a stock. There have been many studies on how shorting Jim’s picks the day after he makes them and covering within a week will give a nice net profit.


  2. Jeff,
    Well, it depends on the definition of swarming. As you see it, swarming is the behaviour of a lot of people who are focusing on the same item, e.g. a particular stock. This is a very minimalistic definition.
    I think that swarming has to be more than that. In a swarm (think of a flock of birds) the individuals respond to eachother (avoiding collision but sticking together). This means they can observe eachother individually and exchange information directly between them.
    Considering that individual traders exchange info on their weblogs and discussion groups, I have to admit that indeed we could speak of some swarming behaviour.
    But finally, stock trading has nothing to do with real swarm intelligence, meaning an intelligent outcome way beyond the comprehension of any individual of the swarm.

  3. One of the oldest tricks in the book is to have a couple of guys create a key reversal in a stock, commodity, or whatever. That’s pretty easy to do at the right time of the day, and costs very little. When the chart guys jump all over it, the guys let them have all of whatever they’re buying and they have to bail. I consider that a swarm. However, your flock of birds analogy has merit. As I’m not a real fan of anecdotal evidence, I guess I’ll have to do some serious number crunching, and apply the scientific method to see the results of what I consider to be swarming in the market. I’ll ask some my learned friends over at Victor Niederhoffer’s site what they think. You ought to check that site out if you want some astute market insight by real hedge fund players and professional traders. Disclosure: I sometimes write for that site.


  4. Perhaps I saw it to black and white. Swarming and swarm intelligence can also be seen in a lot of ways.
    I already mentioned the possible interaction direct interactions of the traders trough their discussion fora on the web.
    In an ant heap, the ants do not know what they are doing, they just respond on what they see : current state of the heap (or at least the part where they stand), the presence/absence of other ants, the presence of feromones. In other words : the results of what the ants did.
    Compared to stock trading : the only thing besides the side-info on the web is the stock prices, reflecting what the traders did. Perhaps somewhat less sophisticated than the ant behaviour, but nevertheless comparable.
    A striking difference between traders and an ant heap is the fact that the ants have some clue on the identity of the heap. They know the difference between own people and strangers, even of the same species.
    This identity does not exist in a bird flock. Each individual of the same species can join the flock.
    So, I admit, in my original post, I saw it too black and white.
    Thanks for the feedback.

  5. In stock trading, or trading in any manner, much more info exists than the price. Different people have different aims and needs when selling a stock, and not all needs are profit motivated. That being said, the price in the market is the summation of everybody’s opinion of what it should be, at that particular instant in time. Call it a collective consciousness..that’s the market. That’s why sometimes the phrase, “individual hand guiding the market” is often said.

    I looked at some of your other posts and was delighted as to how bright you really are.


  6. I meant “Invisible hand…”


  7. Jeff,
    About my brightness, do not exaggerate. I only try not just to copy things, ideas but also to add up 2 + 2 and what’s in my humble opinion is very important is that I am allways convinced I am right … until somebody convinces me of the opposite. And I give them the opportunity at least to try.
    Listening is the beginning of wisdom.

  8. No, you’re pretty bright.


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