The picture above shows the special light signal that indicates the start of trading. (image by Nora Friedel)
In what follows you can see an interview with me talking about "rattraders" on the Austrian Financial Channel (image by Nora Friedel)
The following text and pictures illustrate an experiment I carried out that involved training laboratory standard rats in trading in the Foreign Exchange and Commodity Futures markets, with the result that I managed to outperform some of the world' s leading Human Fund managers. The conceptualizing, training, and organization of data was hard work- I broke it down into different steps:
STEP 1 DEVELOPMENT OF TICKER TRACKS
The first part of the experiment was the generation of so called ticker tracks; I used tick data from various futures and foreign exchange markets in order to generate sound in accordance to the real time price data. The relevant literature indicated that rats especially respond to piano sounds, so I used these as a base for the ticker tracks. I used a Software called Sonification Sandbox, provided by the School of Psychology at the Gerorgia Institute of technology. The sonification sandbox sofware is the ideal environment to transform data into sound, which is commonly known in science as Sonification.
The sound was modulated in correlation with the price movement: when the price went up, the pitch went up, always depending on how strong the up-movement had been. When prices dropped, the following sound's pitch was reduced, depending on how strong the price had fallen. Always in regard to how long it took for the next trade to happen (time between trades can vary between one second and one minute occasionally), I used different kinds of piano modulations. After some tests, we found that our subjects reacted best to 25 price ticks or sounds, so one track was to take 10 to 20 seconds accordingly, depending on the market movements.
The following illustrations show some of the charts and historic real time data used. The viewer might also get an impression of what the sound files looked like.
This way we were able to listen to the Sound of Futures Markets. Keep in mind that the data used are only tick data- the last three digits of the futures quote.
TICKER TRACK NR231 EUR/USD FUTURE MAY22nd 2006 15:22
TICKER TRACK NR320 EUR/USD FUTURE SEP09nd 2006 11:01
TICKER TRACK NR442 EUR/USD FUTURE FEB12 2007 08:20
STEP 2 TRAINING THE RAT TRADERS
The next step was the rats' training. I produced about 800 different ticker tracks of different market situations. Since I did not want to render the whole story too complicated, I only used the USD/EUR future to turn the rats into experts in this specific market segment: other rats though may be educated in other markets as well. The training took about three months. I started with 80 Sprague Dawley laboratory rats, 40 males and 40 females, with the intention to cross the best of them to genetically create the best traders through select breeding. The training environment was a so called Skinner Box, widely used in experiments and industry for behavioral experiments with animals. The rats were separately trained for five hours daily (thanks to Anna, Gerda, and Dirk who did a great job in the past months). Every day the rats were confronted with 100 different ticker tracks; the goal was making them seek out sound-patterns that humans are not able to recognize and predicting the next market move after the last sound heard. ( I am currently working on a website enlisting human training programs as well). Each time after listening to a sound, the rat had to choose between pressing either a green or a red button, green for "long" (if the prices were expected to move up), red for "short" (if they predicted a decline in prices). When they were right they received a small amount of food (the good rats became fat very fast); when they took the wrong button, they received a minor electric shock. Very soon it showed that some rats were doing outstandingly well: they developed a good ability to remember the patterns they were listening to; we needed them to react to real time data though. To get there, we developed the following training cycle:
week 1 training with historic ticker tracks 1 to 200
week 2 training with historic ticker tracks 201 to 400
week 3 training with historic ticker tracks 401 to 600
week 4 training with historic ticker tracks 1 to 200
week 5 training with historic ticker tracks 201 to 400
week 6 training with historic ticker tracks 401 to 600
at this point the rats from the first round that did not improve were sorted out; 32 rats stayed.
week 7 training with historic ticker tracks 1 to 200
week 8 training with historic ticker tracks 201 to 400
week 9 training with historic ticker tracks 401 to 600
again we excluded the non-improving candidates from the training group; now we had 22 rats left.
week 10 training with historic ticker tracks 601 to 700
this was the real test now: the future traders had not heard the tracks before. We had to sort out another 6 rats
week 12 training and testing with historic ticker tracks 701 to 800 without repeating any of the tracks during the training
we were now able to make out the really gifted traders and eventually ended the test series with 4 reliable rats:
Mr. Lehmann (we were quite surprised to find he made it)
...the training was almost finished; the performances of the top 4 rats had turned out to be comparable to those of the world' s best fund managers. Their ability to recognize sound patterns generated from the market's ticker tape was incredible. And the rat traders also hold another advantage: unlike their human counterparts, they are not likely to be distracted from news or economy fundamentals, their own personal or their bank's financial status.
STEP 3 DEVELOPING A PEDIGREE
After extensive training, we wanted to find out if the talent in trading might be rooted genetically and crossed the top traders with each other. After only 20 days, we had 28 new rats (15 males and 13 females) , and we soon started to train again (even reducing the training time). The results were astounding: the second generation of top traders had a much better performance than their parents, but undoubtably, further research will be necessary to confirm this finding of ours.
I am now working on a software generating real time ticker tracks in order to put the system to the ultimate test (the real life market conditions). If the performance is good, I will keep the experiment going and either setup an own hedge fund managed by my rats or train rats to work for hedge funds and banks...
(further images and sound files will be uploaded in due time)