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ChatGPT-powered Wall Street: The benefits and perils of using artificial intelligence to trade stocks and other financial instruments

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ChatGPT-powered Wall Street: The benefits and perils of using artificial intelligence to trade stocks and other financial instruments

Markets are increasingly driven by decisions made by AI.
PhonlamaiPhoto/iStock via Getty Images

Pawan Jain, West Virginia University

Artificial Intelligence-powered tools, such as ChatGPT, have the potential to revolutionize the efficiency, effectiveness and speed of the work humans do.

And this is true in financial markets as much as in sectors like health care, manufacturing and pretty much every other aspect of our lives.

I’ve been researching financial markets and algorithmic trading for 14 years. While AI offers lots of benefits, the growing use of these technologies in financial markets also points to potential perils. A look at Wall Street’s past efforts to speed up trading by embracing computers and AI offers important lessons on the implications of using them for decision-making.

Program trading fuels Black Monday

In the early 1980s, fueled by advancements in technology and financial innovations such as derivatives, institutional investors began using computer programs to execute trades based on predefined rules and algorithms. This helped them complete large trades quickly and efficiently.

Back then, these algorithms were relatively simple and were primarily used for so-called index arbitrage, which involves trying to profit from discrepancies between the price of a stock index – like the S&P 500 – and that of the stocks it’s composed of.

As technology advanced and more data became available, this kind of program trading became increasingly sophisticated, with algorithms able to analyze complex market data and execute trades based on a wide range of factors. These program traders continued to grow in number on the largey unregulated trading freeways – on which over a trillion dollars worth of assets change hands every day – causing market volatility to increase dramatically.

Eventually this resulted in the massive stock market crash in 1987 known as Black Monday. The Dow Jones Industrial Average suffered what was at the time the biggest percentage drop in its history, and the pain spread throughout the globe.

In response, regulatory authorities implemented a number of measures to restrict the use of program trading, including circuit breakers that halt trading when there are significant market swings and other limits. But despite these measures, program trading continued to grow in popularity in the years following the crash.

a bunch of black and white newspaper front pages are layered on top of each other with words like panic and crash and wall street
This is how papers across the country headlined the stock market plunge on Black Monday, Oct. 19, 1987.
AP Photo

HFT: Program trading on steroids

Fast forward 15 years, to 2002, when the New York Stock Exchange introduced a fully automated trading system. As a result, program traders gave way to more sophisticated automations with much more advanced technology: High-frequency trading.

HFT uses computer programs to analyze market data and execute trades at extremely high speeds. Unlike program traders that bought and sold baskets of securities over time to take advantage of an arbitrage opportunity – a difference in price of similar securities that can be exploited for profit – high-frequency traders use powerful computers and high-speed networks to analyze market data and execute trades at lightning-fast speeds. High-frequency traders can conduct trades in approximately one 64-millionth of a second, compared with the several seconds it took traders in the 1980s.

These trades are typically very short term in nature and may involve buying and selling the same security multiple times in a matter of nanoseconds. AI algorithms analyze large amounts of data in real time and identify patterns and trends that are not immediately apparent to human traders. This helps traders make better decisions and execute trades at a faster pace than would be possible manually.

Another important application of AI in HFT is natural language processing, which involves analyzing and interpreting human language data such as news articles and social media posts. By analyzing this data, traders can gain valuable insights into market sentiment and adjust their trading strategies accordingly.

Benefits of AI trading

These AI-based, high-frequency traders operate very differently than people do.

The human brain is slow, inaccurate and forgetful. It is incapable of quick, high-precision, floating-point arithmetic needed for analyzing huge volumes of data for identifying trade signals. Computers are millions of times faster, with essentially infallible memory, perfect attention and limitless capability for analyzing large volumes of data in split milliseconds.

And, so, just like most technologies, HFT provides several benefits to stock markets.

These traders typically buy and sell assets at prices very close to the market price, which means they don’t charge investors high fees. This helps ensure that there are always buyers and sellers in the market, which in turn helps to stabilize prices and reduce the potential for sudden price swings.

High-frequency trading can also help to reduce the impact of market inefficiencies by quickly identifying and exploiting mispricing in the market. For example, HFT algorithms can detect when a particular stock is undervalued or overvalued and execute trades to take advantage of these discrepancies. By doing so, this kind of trading can help to correct market inefficiencies and ensure that assets are priced more accurately.

a crowd of people move around a large room with big screens all over the place
Stock exchanges used to be packed with traders buying and selling securities, as in this scene from 1983. Today’s trading floors are increasingly empty as AI-powered computers handle more and more of the work.
AP Photo/Richard Drew

The downsides

But speed and efficiency can also cause harm.

HFT algorithms can react so quickly to news events and other market signals that they can cause sudden spikes or drops in asset prices.

Additionally, HFT financial firms are able to use their speed and technology to gain an unfair advantage over other traders, further distorting market signals. The volatility created by these extremely sophisticated AI-powered trading beasts led to the so-called flash crash in May 2010, when stocks plunged and then recovered in a matter of minutes – erasing and then restoring about $1 trillion in market value.

Since then, volatile markets have become the new normal. In 2016 research, two co-authors and I found that volatility – a measure of how rapidly and unpredictably prices move up and down – increased significantly after the introduction of HFT.

The speed and efficiency with which high-frequency traders analyze the data mean that even a small change in market conditions can trigger a large number of trades, leading to sudden price swings and increased volatility.

In addition, research I published with several other colleagues in 2021 shows that most high-frequency traders use similar algorithms, which increases the risk of market failure. That’s because as the number of these traders increases in the marketplace, the similarity in these algorithms can lead to similar trading decisions.

This means that all of the high-frequency traders might trade on the same side of the market if their algorithms release similar trading signals. That is, they all might try to sell in case of negative news or buy in case of positive news. If there is no one to take the other side of the trade, markets can fail.

Enter ChatGPT

That brings us to a new world of ChatGPT-powered trading algorithms and similar programs. They could take the problem of too many traders on the same side of a deal and make it even worse.

In general, humans, left to their own devices, will tend to make a diverse range of decisions. But if everyone’s deriving their decisions from a similar artificial intelligence, this can limit the diversity of opinion.

Consider an extreme, nonfinancial situation in which everyone depends on ChatGPT to decide on the best computer to buy. Consumers are already very prone to herding behavior, in which they tend to buy the same products and models. For example, reviews on Yelp, Amazon and so on motivate consumers to pick among a few top choices.

Since decisions made by the generative AI-powered chatbot are based on past training data, there would be a similarity in the decisions suggested by the chatbot. It is highly likely that ChatGPT would suggest the same brand and model to everyone. This might take herding to a whole new level and could lead to shortages in certain products and service as well as severe price spikes.

This becomes more problematic when the AI making the decisions is informed by biased and incorrect information. AI algorithms can reinforce existing biases when systems are trained on biased, old or limited data sets. And ChatGPT and similar tools have been criticized for making factual errors.

In addition, since market crashes are relatively rare, there isn’t much data on them. Since generative AIs depend on data training to learn, their lack of knowledge about them could make them more likely to happen.

For now, at least, it seems most banks won’t be allowing their employees to take advantage of ChatGPT and similar tools. Citigroup, Bank of America, Goldman Sachs and several other lenders have already banned their use on trading-room floors, citing privacy concerns.

But I strongly believe banks will eventually embrace generative AI, once they resolve concerns they have with it. The potential gains are too significant to pass up – and there’s a risk of being left behind by rivals.

But the risks to financial markets, the global economy and everyone are also great, so I hope they tread carefully.The Conversation

Pawan Jain, Assistant Professor of Finance, West Virginia University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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In Disney’s ‘Moana,’ the characters navigate using the stars, just like real Polynesian explorers − an astronomer explains how these methods work

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theconversation.com – Christopher Palma, Teaching Professor, Department of Astronomy & Astrophysics, Penn State – 2024-12-20 07:17:00

Wayfarers around the world have used the stars to navigate the sea.
Wirestock/iStock via Getty Images Plus

Christopher Palma, Penn State

If you have visited an island like one of the Hawaiian Islands, Tahiti or Easter Island, also known as Rapa Nui, you may have noticed how small these land masses appear against the vast Pacific Ocean. If you’re on Hawaii, the nearest island to you is more than 1,000 miles (1,600 kilometers) away, and the coast of the continental United States is more than 2,000 miles (3,200 kilometers) away. To say these islands are secluded is an understatement.

For me, watching the movie “Moana” in 2016 was eye-opening. I knew that Polynesian people traveled between a number of Pacific islands, but seeing Moana set sail on a canoe made me realize exactly how small those boats are compared with what must have seemed like an endless ocean. Yet our fictional hero went on this journey anyway, like the countless real-life Polynesian voyagers upon which she is based.

Oceania as shown from the ISS
Islands in Polynesia can be thousands of miles apart.
NASA

As an astronomer, I have been teaching college students and visitors to our planetarium how to find stars in our sky for more than 20 years. As part of teaching appreciation for the beauty of the sky and the stars, I want to help people understand that if you know the stars well, you can never get lost.

U.S. Navy veterans learned the stars in their navigation courses, and European cultures used the stars to navigate, but the techniques of Polynesian wayfinding shown in Moana brought these ideas to a very wide audience.

The movie Moana gave me a new hook – pun not intended – for my planetarium shows and lessons on how to locate objects in the night sky. With “Moana 2” out now, I am excited to see even more astronomy on the big screen and to figure out how I can build new lessons using the ideas in the movie.

The North Star

Have you ever found the North Star, Polaris, in your sky? I try to spot it every time I am out observing, and I teach visitors at my shows to use the “pointer stars” in the bowl of the Big Dipper to find it. These two stars in the Big Dipper point you directly to Polaris.

If you are facing Polaris, then you know you are facing north. Polaris is special because it is almost directly above Earth’s North Pole, and so everyone north of the equator can see it year-round in exactly the same spot in their sky.

It’s a key star for navigation because if you measure its height above your horizon, that tells you how far you are north of Earth’s equator. For the large number of people who live near 40 degrees north of the equator, you will see Polaris about 40 degrees above your horizon.

If you live in northern Canada, Polaris will appear higher in your sky, and if you live closer to the equator, Polaris will appear closer to the horizon. The other stars and constellations come and go with the seasons, though, so what you see opposite Polaris in the sky will change every month.

Look for the Big Dipper to find the North Star, Polaris.

You can use all of the stars to navigate, but to do that you need to know where to find them on every night of the year and at every hour of the night. So, navigating with stars other than Polaris is more complicated to learn.

Maui’s fishhook

At the end of June, around 11 p.m., a bright red star might catch your eye if you look directly opposite from Polaris. This is the star Antares, and it is the brightest star in the constellation Scorpius, the Scorpion.

If you are a “Moana” fan like me and the others in my family, though, you may know this group of stars by a different name – Maui’s fishhook.

If you are in the Northern Hemisphere, Scorpius may not fully appear above your horizon, but if you are on a Polynesian island, you should see all of the constellation rising in the southeast, hitting its highest point in the sky when it is due south, and setting in the southwest.

Astronomers and navigators can measure latitude using the height of the stars, which Maui and Moana did in the movie using their hands as measuring tools.

The easiest way to do this is to figure out how high Polaris is above your horizon. If you can’t see it at all, you must be south of the equator, but if you see Polaris 5 degrees (the width of three fingers at arm’s length) or 10 degrees above your horizon (the width of your full fist held at arm’s length), then you are 5 degrees or 10 degrees north of the equator.

The other stars, like those in Maui’s fishhook, will appear to rise, set and hit their highest point at different locations in the sky depending on where you are on the Earth.

Polynesian navigators memorized where these stars would appear in the sky from the different islands they sailed between, and so by looking for those stars in the sky at night, they could determine which direction to sail and for how long to travel across the ocean.

Today, most people just pull out their phones and use the built-in GPS as a guide. Ever since “Moana” was in theaters, I see a completely different reaction to my planetarium talks about using the stars for navigation. By accurately showing how Polynesian navigators used the stars to sail across the ocean, Moana helps even those of us who have never sailed at night to understand the methods of celestial navigation.

The first “Moana” movie came out when my son was 3 years old, and he took an instant liking to the songs, the story and the scenery. There are many jokes about parents who dread having to watch a child’s favorite over and over again, but in my case, I fell in love with the movie too.

Since then, I have wanted to thank the storytellers who made this movie for being so careful to show the astronomy of navigation correctly. I also appreciated that they showed how Polynesian voyagers used the stars and other clues, such as ocean currents, to sail across the huge Pacific Ocean and land safely on a very small island thousands of miles from their home.The Conversation

Christopher Palma, Teaching Professor, Department of Astronomy & Astrophysics, Penn State

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Listening for the right radio signals could be an effective way to track small drones

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theconversation.com – Iain Boyd, Director of the Center for National Security Initiatives and Professor of Aerospace Engineering Sciences, University of Colorado Boulder – 2024-12-17 17:28:00

Small drones can be hard to track at night.
Kevin Carter/Getty Images

Iain Boyd, University of Colorado Boulder

The recent spate of unidentified drone sightings in the U.S., including some near sensitive locations such as airports and military installations, has caused significant public concern.

Some of this recent increase in activity may be related to a September 2023 change in U.S. Federal Aviation Administration regulations that now allow drone operators to fly at night. But most of the sightings are likely airplanes or helicopters rather than drones.

The inability of the U.S. government to definitively identify the aircraft in the recent incidents, however, has some people wondering, why can’t they?

I am an engineer who studies defense systems. I see radio frequency sensors as a promising approach to detecting, tracking and identifying drones, not least because drone detectors based on the technology are already available. But I also see challenges to using the detectors to comprehensively spot drones flying over American communities.

How drones are controlled

Operators communicate with drones from a distance using radio frequency signals. Radio frequency signals are widely used in everyday life such as in garage door openers, car key fobs and, of course, radios. Because the radio spectrum is used for so many different purposes, it is carefully regulated by the Federal Communications Commission.

Drone communications are only allowed in narrow bands around specific frequencies such as at 5 gigahertz. Each make and model of a drone uses unique communication protocols coded within the radio frequency signals to interpret instructions from an operator and to send data back to them. In this way, a drone pilot can instruct the drone to execute a flight maneuver, and the drone can inform the pilot where it is and how fast it is flying.

Identifying drones by radio signals

Radio frequency sensors can listen in to the well-known drone frequencies to detect communication protocols that are specific to each particular drone model. In a sense, these radio frequency signals represent a unique fingerprint of each type of drone.

In the best-case scenario, authorities can use the radio frequency signals to determine the drone’s location, range, speed and flight direction. These radio frequency devices are called passive sensors because they simply listen out for and receive signals without taking any active steps. The typical range limit for detecting signals is about 3 miles (4.8 kilometers) from the source.

These sensors do not represent advanced technology, and they are readily available. So, why haven’t authorities made wider use of them?

Drones were all the buzz in the Northeast at the end of 2024.

Challenges to using radio frequency sensors

While the monitoring of radio frequency signals is a promising approach to detecting and identifying drones, there are several challenges to doing so.

First, it’s only possible for a sensor to obtain detailed information on drones that the sensor knows the communication protocols for. Getting sensors that can detect a wide range of drones will require coordination between all drone manufacturers and some central registration entity.

In the absence of information that makes it possible to decode the radio frequency signals, all that can be inferred about a drone is a rough idea of its location and direction. This situation can be improved by deploying multiple sensors and coordinating their information.

Second, the detection approach works best in “quiet” radio frequency environments where there are no buildings, machinery or people. It’s not easy to confidently attribute the unique source of a radio frequency signal in urban settings and other cluttered environments. Radio frequency signals bounce off all solid surfaces, making it difficult to be sure where the original signal came from. Again, the use of multiple sensors around a particular location, and careful placement of those sensors, can help to alleviate this issue.

Third, a major part of the concern over the inability to detect and identify drones is that they may be operated by criminals or terrorists. If drone operators with malicious intent know that an area targeted for a drone operation is being monitored by radio frequency sensors, they may develop effective countermeasures. For example, they may use signal frequencies that lie outside the FCC-regulated parameters, and communication protocols that have not been registered. An even more effective countermeasure is to preprogram the flight path of a drone to completely avoid the use of any radio frequency communications between the operator and the drone.

Finally, widespread deployment of radio frequency sensors for tracking drones would be logistically complicated and financially expensive. There are likely thousands of locations in the U.S. alone that might require protection from hostile drone attacks. The cost of deploying a fully effective drone detection system would be significant.

There are other means of detecting drones, including radar systems and networks of acoustic sensors, which listen for the unique sounds drones generate. But radar systems are relatively expensive, and acoustic drone detection is a new technology.

The way forward

It was almost guaranteed that at some point the problem of unidentified drones would arise. People are operating drones more and more in regions of the airspace that have previously been very sparsely populated.

Perhaps the recent concerns over drone sightings are a wake-up call. The airspace is only going to become much more congested in the coming years as more consumers buy drones, drones are used for more commercial purposes, and air-taxis come into use. There’s only so much that drone detection technologies can do, and it might become necessary for the FAA to tighten regulation of the nation’s airspace by, for example, requiring drone operators to submit detailed flight plans.

In the meantime, don’t be too quick to assume those blinking lights you see in the night sky are drones.The Conversation

Iain Boyd, Director of the Center for National Security Initiatives and Professor of Aerospace Engineering Sciences, University of Colorado Boulder

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Vaccine misinformation distorts science – a biochemist explains how RFK Jr. and his lawyer’s claims threaten public health

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theconversation.com – Mark R. O’Brian, Professor and Chair of Biochemistry, University at Buffalo – 2024-12-17 07:01:00

Many fatal childhood illnesses can be prevented with vaccination.
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Mark R. O’Brian, University at Buffalo

Vaccinations provide significant protection for the public against infectious diseases and substantially reduce health care costs. Therefore, it is noteworthy that President-elect Donald Trump wants Robert F. Kennedy Jr., a leading critic of childhood vaccination, to be secretary of Health and Human Services.

Doctors, scientists and public health researchers have expressed concerns that Kennedy would turn his views into policies that could undermine public health. As a case in point, news reports have highlighted how Kennedy’s lawyer, Aaron Siri, has in recent years petitioned the Food and Drug Administration to withdraw or suspend approval of numerous vaccines over alleged safety concerns.

I am a biochemist and molecular biologist studying the roles microbes play in health and disease. I also teach medical students and am interested in how the public understands science.

Here are some facts about vaccines that Kennedy and Siri get wrong:

Vaccines are effective and safe

Public health data from 1974 to the present conclude that vaccines have saved at least 154 million lives worldwide over the past 50 years. Vaccines are also continually monitored for safety in the U.S.

Nevertheless, the false claim that vaccines cause autism persists despite study after study of large populations throughout the world showing no causal link between them.

Claims about the dangers of vaccines often come from misrepresenting scientific research papers. In an interview with podcaster Joe Rogan, Kennedy incorrectly cited studies allegedly showing vaccines cause massive brain inflammation in laboratory monkeys, and that the hepatitis B vaccine increases autism rates in children by over 1,000-fold compared with unvaccinated kids. Those studies make no such claims.

In the same interview, Kennedy also made the unusual claim that a 2002 vaccine study included a control group of children 6 months of age and younger who were fed mercury-contaminated tuna sandwiches. No sandwiches are mentioned in that study.

Similarly, Siri filed a petition in 2022 to withdraw approval of a polio vaccine based on alleged safety concerns. The vaccine in question is made from an inactivated form of the polio virus, which is safer than the previously used live attenuated vaccine. The inactivated vaccine is made from polio virus cultured in the Vero cell line, a type of cell that researchers have been safely using for various medical applications since 1962. While the petition uses provocative language comparing this cell line to cancer cells, it does not claim that it causes cancer.

Gloved hands of clinician placing band-aid on child's arm, a syringe and vaccine vial beside them
Vaccines are continuously monitored for safety before and long after they’re made available to the general public.
Elena Zaretskaya/Moment via Getty Images

Vaccines undergo the same approval process as other drugs

Clinical trials for vaccines and other drugs are blinded, randomized and placebo-controlled studies. For a vaccine trial, this means that participants are randomly divided into one group that receives the vaccine and a second group that receives a placebo saline solution. The researchers carrying out the study, and sometimes the participants themselves, do not know who has received the vaccine or the placebo until the study has finished. This eliminates bias.

Results are published in the public domain. For example, vaccine trial data for COVID-19, human papilloma virus, rotavirus and hepatitis B are available for anyone to access.

Aluminum adjuvants help boost immunity

Kennedy is co-counsel with a law firm that is suing the pharmaceutical company Merck based in part on the unfounded assertion that the aluminum in one of its vaccines causes neurological disease. Aluminum is added to many vaccines as an adjuvant to strengthen the body’s immune response to the vaccine, thereby enhancing the body’s defense against the targeted microbe.

The law firm’s claim is based on a 2020 report showing that brain tissue from some patients with Alzheimer’s disease, autism and multiple sclerosis have elevated levels of aluminum. The authors of that study do not assert that vaccines are the source of the aluminum, and vaccines are unlikely to be the culprit.

Notably, the brain samples analyzed in that study were from 47- to 105-year-old patients. Most people are exposed to aluminum primarily through their diets, and aluminum is eliminated from the body within days. Therefore, aluminum exposure from childhood vaccines is not expected to persist in those patients.

Ironically, Kennedy’s lawyer, Siri, wants the FDA to withdraw some vaccines for containing less aluminum than stated by the manufacturer.

Vaccine manufacturers are liable for injury or death

Kennedy’s lawsuit against Merck contradicts his insistence that vaccine manufacturers are fully immune from litigation.

His claim is based on an incorrect interpretation of the National Vaccine Injury Compensation Program, or VICP. The VICP is a no-fault federal program created to reduce frivolous lawsuits against vaccine manufacturers, which threaten to cause vaccine shortages and a resurgence of vaccine-preventable disease.

A person claiming injury from a vaccine can petition the U.S. Court of Federal Claims through the VICP for monetary compensation. If the VICP petition is denied, the claimant can then sue the vaccine manufacturer.

Gloved hand picking up vaccine vial among a tray of vaccine vials
Drug manufacturers are liable for any vaccine-related death or injury.
Andreas Ren Photography Germany/Image Source via Getty Images

The majority of cases resolved under the VICP end in a negotiated settlement between parties without establishing that a vaccine was the cause of the claimed injury. Kennedy and his law firm have incorrectly used the payouts under the VICP to assert that vaccines are unsafe.

The VICP gets the vaccine manufacturer off the hook only if it has complied with all requirements of the Federal Food, Drug and Cosmetic Act and exercised due care. It does not protect the vaccine maker from claims of fraud or withholding information regarding the safety or efficacy of the vaccine during its development or after approval.

Good nutrition and sanitation are not substitutes for vaccination

Kennedy asserts that populations with adequate nutrition do not need vaccines to avoid infectious diseases. While it is clear that improvements in nutrition, sanitation, water treatment, food safety and public health measures have played important roles in reducing deaths and severe complications from infectious diseases, these factors do not eliminate the need for vaccines.

After World War II, the U.S. was a wealthy nation with substantial health-related infrastructure. Yet, Americans reported an average of 1 million cases per year of now-preventable infectious diseases.

Vaccines introduced or expanded in the 1950s and 1960s against diseases like diphtheria, pertussis, tetanus, measles, polio, mumps, rubella and Haemophilus influenza B have resulted in the near or complete eradication of those diseases.

It’s easy to forget why many infectious diseases are rarely encountered today: The success of vaccines does not always tell its own story. RFK Jr.’s potential ascent to the role of secretary of Health and Human Services will offer up ample opportunities to retell this story and counter misinformation.

This is an updated version of an article originally published on July 26, 2024.The Conversation

Mark R. O’Brian, Professor and Chair of Biochemistry, University at Buffalo

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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