Alex Soojung-Kim Pang, Ph.D.

I study people, technology, and the worlds they make

Tag: finance

“The rise of long-term robots may be upon us”

We all know that computerized and automated trading has had a huge impact on short-term trading, simply by exploiting the speed of computers to react to market changes faster than humans can (or other, slightly slower computers); but could artificial intelligence have an effect on long-term trading?

AIs offer a new form of investment technology that, for the first time in 4,000 years, could give investors a truly game-changing edge that doesn’t rely so heavily on speed.

AIs will be able to consider — just as AlphaGo did for Go — deeper risks and even uncertainties of future markets, future growth and future scenarios and, in turn, provide investors with tools that can dramatically increase long-term returns. Looking out over a longer time horizon, an AI could learn to unearth factors that are truly material for an underlying company or asset and then base investment recommendations on the performance of those characteristics. It may take time for these performances to be realized, but that’s not a problem for long-term investors.

Imagine then that these inferential tools become so powerful that asset managers stop relying on trading technologies for their edge and begin to rely on inferential technologies that extend the average holding periods of investments. Crazy? Well, as my postdoc at Stanford, Dane Rook, occasionally reminds me, we are surely nearing a hard limit in the speed of data transmission: Data can’t travel faster than the speed of light. However, is there any such equivalent upper bound to the inferential depth that is possible? It’s hard to say, but with enough data it may not be so!

The rise of long-term robots may be upon us, and that could be a catalyst for investment time horizons to reverse their current downward trend. That’d be a very good thing for the future of finance and, indeed, capitalism.

Source: Rise, Long-Term Robots. Rise! | Institutional Investor

The New Abnormal in investing

NetNet, which is kind of like Matt Taibbi without all the swear words or Michael Lewis without the humor, has an interesting piece on investing in 2020, based on the work of investment strategist Nick Colas:

Colas draws some common-sense conclusions based on all the inflation likely to be pumped into the system and the higher tax rates that will be needed to pay for the trillions in sovereign debt floating out there and coming to maturity in the next decade.

Viewed through that prism, a 10-year forecast doesn’t sound so silly after all.

“I don’t think you can crush the US housing market and global banking sector, replace it with central bank liquidity on an unprecedented scale, see historically high and sticky unemployment, and witness rolling mini-crises of sovereign debt concerns without thinking that the landscape is going to be very different for a long time,” he writes.

Most of what I hear from really thoughtful people makes me very pessimistic about the long-term prospects for investment. My bad habit of not putting as much money in my retirement as I meant to (hey, everyone does it) has started to look shrewd.

Making calculation social. Or, how the iPad might reshape financial markets

The always-interesting Daniel Beunza has an excellent post on socializing finance asking "What possibilities does a tactile, mobile device like the iPad bring to securities trading?"

I’ll venture a guess. By bringing together calculation and social interaction, numbers and people, judgement and logic, the iPad may rejuvenate financial exchanges, making them more calculative. And also reinvigorate trading rooms in banks, freeing arbs from their chains of their desks….

New affordances create new needs. The challenge is to imagine those needs before they arise. Interestingly, Steve Jobs does not get this simple point. Or at least that’s what I got from watching his presentation of the iPad. For the tablet to be justified, Jobs said, it should let you browse the web better than a computer and a phone. Actually, it’s the opposite. The tablet should focus on new things that only a widescreen mobile wireless device can do. Social web browsing, for instance. Or situated problem-solving. Marrying mobility and Excel, flicker and pubs.

The whole thing is well worth reading. To me, it's a very nice example of how people interested in information technology and the future should think: a thoughtfulness about the many and various (and sometimes contradictory) ways technologies are used in the workplace, an awareness of the importance of affordances and ergonomics, and a willingness to think about the various ways technologies could play out in a context. Far too often futurists think about technology's impact in terms that are at once overly narrow and overreaching– e.g., "the next turn of Moore's Law will bring about a collapse of the pet food industry!"– and don't do justice to contingency and agency.

One last high-frequency trading post for the day

Even though this is a perfect illustration of things I talk about in the book, I'll do one more round of quotes (which'll find their way into the book), then turn to other things.

First, via Andymatic, this piece from Ars Technica:

The Matrix, but with money: the world of high-speed trading

Supercomputers pitted against one another in a high-stakes battle of attack and counterattack over a global network where predatory algorithms trawl the information stream, competing every millisecond to gain an informational advantage over rivals. It sounds like Hollywood fiction, but it's just an average trading day on the stock market.

Because high-frequency trading is, as Richard Bookstaber has recently described it, an "arms race" where relative speed matters much more than absolute speed, this market is one of the few left with a demand for raw performance at any cost. Indeed, my personal introduction to the world of HFT came in bits and pieces over the past few years via parts of briefings from the Intel, NVIDIA, AMD and their would-be competitors, all of whom have been aggressively pursuing this market….

In all, it's ironic that the hardware that HFT platforms are using to battle it out over stocks, bonds, commodities, and other assets is essentially the same as the technology that PC gamers are using to play their own games with much lower stakes.

And this observation from Rich Bookstaber:

I think the days for high frequency trading are numbered. For one thing, high frequency trading is capacity constrained like few other strategies. The high frequency trader is basically a stand-alone market maker; he is sitting there to provide liquidity to others. And one way he provides it is to pull in the positions that others will shortly be demanding – thus the need for speed. If the footprint for high frequency traders gets too large, they become liquidity demanders themselves, and the gig is up. The Renaissances of the strategy will make their way through, but generally we will see a lot of shooting stars.

A second reason is that high frequency trading is embroiled in an arms race. And arms races are negative sum games. The arms in this case are not tanks and jets, but computer chips and throughput. But like any arms race, the result is a cycle of spending which leaves everyone in the same relative position, only poorer. Put another way, like any arms race, what is happening with high frequency trading is a net drain on social welfare.

[To the tune of Transglobal Underground, "Khalghi Stomp," from the album Versions (I give it 1 stars).]

More on high-frequency trading and colocation

This from a 2007 article from Low Latency:

Firms are turning to electronic trading, in part because a 1-millisecond advantage in trading applications can be worth millions of dollars a year to a major brokerage firm. That is why colocation — in which firms move the systems running their algorithms as close to the exchanges as possible — is so popular.

The need for speed has opened up opportunities for nontraditional competitors in the space, and it has provided established exchanges with new revenue opportunities, such as colocation services for companies that wish to place their servers in direct physical proximity to the exchanges' systems. Electronic trading also has created opportunities for a new class of vendors — execution services firms and systems integrators promising the fastest possible transaction times….

Physical colocation eliminates the unavoidable time lags inherent in even the fastest wide area networks. Servers in shared data centers typically are connected via Gigabit Ethernet, with the ultrahigh-speed switching fabric called InfiniBand increasingly used for the same purpose, relates Yaron Haviv, CTO at Voltaire, a supplier of systems that Haviv contends can achieve latencies of less than 1 millionth of a second….

The NYSE will begin reducing its 10 data centers, including those associated with Euronext, to two in the next couple of years, says CTO Steve Rubinow. Colocation, Rubinow says, not only guarantees fast transactions but also predictable ones. "If you've got some trades going through at 10 milliseconds and some at 1 millisecond, that's a problem," he says. "Our customers don't like variance."

There's also this interesting tidbit about place and security:

Later this year, Nasdaq will shutter its data center in Trumbull, Conn., and move all operations to one opened last year in New Jersey, with a backup in the mid-Atlantic region, the exchange's Hyndman says. (Trading firms and exchanges are reluctant to disclose the exact locations of their data centers.)

So what's this mean for the future?

Once you hit physical limits to data-transmission speeds, where do you go from there?… There are two schools of thought on this issue. One is that traders, exchanges and brokers must shave latency from other parts of the system — in the applications they use, for instance — and that the race will continue.

The other is that latency will cease to be an issue once everyone has access to the same trading infrastructure and that other, older-school elements of the business, such as customer service and market savvy, will once again become the differentiators. "Shortly, we'll be talking micro- versus milliseconds, and at that point speed will probably have less and less relevance," says Lime Brokerage's [Alistair] Brown. "Once you've got half a dozen systems that can all handle that kind of throughput, then you have to distinguish yourself somewhere else."

[To the tune of Fear Of Pop, "In Love," from the album Versions (I give it 3 stars).]

High-frequency trading and the persistence of place

One of the enduring expectations about cyberspace is that it would erase the importance of place in commerce. A group of designers working in ateliers and studios in Nairobi, Munich, Buenos Aires and Perth, financed by money pulled together in Silicon Valley, would create products sourced to factories in Malaysia and China, thence to be sold in Seoul, Mumbai, Toronto… you get the picture. Talent was what would matter in this world. Place wouldn't.

Ironically, you can make the case that the trend toward placelessness has been most evident in manufacturing, though it's been so for a combination of brutal economic rather than utopian technological reasons, and has required an enormous amount of labor to make those transfers work. Put another way, manufacturing has become more placeless not because technology has made place irrelevent, but because it's helped connect multinationals to mouth-wateringly cheap labor markets. But it hasn't been a matter of effortlessly transferring zeroes and ones around the world at the speed: to make this system work, you've got to put a lot of engineers on planes to Shanghai, just as you need to get a lot of farmers' kids into the cities.

Placelessness has also had a mixed record in finance, the most abstract of economic activities. On one hand, I can transfer money between my checking and savings account on my iPhone. On the other, the financial centers in New York and London are now even more tightly connected together, and process a greater portion of the world's wealth, than ever before. (And as recent events have shown, they have a greater capacity to destroy it, too.) So place continues to matter in finance, even as technology makes some kinds of transactions easier to conduct in a wider variety of places.

This trend is something that's interested a number of cultural and economic geographers, though they're still lots to do on the subject. As Caitlin Zaloom, an amazingly smart observer of the enduring materiality and social nature of financial markets, says,

Globalization theorists such as David Harvey and Manuel Castells argue that under neoliberalism, capitalist institutions have used information technology to flatten the distinctions among places, reducing the significance of spatial distance and temporal difference. They claim that this is nowhere more true than in the sphere of global finance, since economic networks are bound together with technological systems that permit institutions to coordinate activity in real time on a planetary scale, and that allow modern financial instruments to turn commodities—oranges, grain, Treasury bonds, and the like—into abstractions that are bought and sold thousands of times without ever moving an inch. Even global skeptics, it seems, are willing to admit that the speed and scale of financial markets enabled by innovative communications technologies is something new and profound. Never before have financial actors been able to trade with dealers from Frankfurt to Singapore at any time of the day or night. However, these depictions often overstate the role of technology, leading observers to believe that such interconnections were inevitable, a narrative that obscures the human activities that propel money through technological channels, including the labors, false starts, and complex histories of the social and technical forms of global work. (Zaloom, "Markets and Machines: Work in the Technological Sensoryscapes of Finance," American Quarterly 58:3 (September 2006) 815-837, quote on 816.)

Today I ran across another example of how place continues to matter in finance, but at a very small scale: high-frequency trading. If the concentration of wealth and financial services in places like New York and London is like gravity, high-frequency trading is like the strong force in particle physics: it operates at very small scales, but at that scale is incredibly powerful. As the New York Times explains in a July article, "in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea." But things have't quite worked out that way:

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

In this world, as UCSD graduate student Martha Poon observes,

The trades are so fast that materiality matters. ‘Co-location’, which involves situating the trading room next to the exchange so that the wires and cables running between them are as short as possible, actually confers an advantage to high frequency traders.

As a result, LSE lecturer Yuval Millo points out,

In a world where every millisecond counts, event at light-speed speeds, physical distance counts. In fact, we should say ‘physical distance’ counts AGAIN. Yes, physical distance, which used to be an all-important factor in the face-to-face trading pits, is now making a comeback in the form of vicinity from the exchanges’ servers.

This, of course, brings back the issues about the politics embedded in market spatiality. Kate Zaloom shows how important were the top steps of the trading pit in the Chicago futures exchanges, and, consequently, how the political (and sometimes physical!) struggles for these coveted locations. Can we expect similar fights to rage over positions in the electronic communication network that transmits trading orders? Judging from the evolving competition for ‘electronic proximity’ the answer is positive. For example, Wall Street & Technology reports that in 2007 about a 100 trading firms relocated their serves into Nasdaq’s trading headquarters, just to be close to the executing servers and to shave off about 7-35 milliseconds from the communication time (depending on previous location of trading servers). Similar trend is evident in NYSE and the Chicago futures markets.

What does trend teach about the techno-social nature of markets? From an actor-network perspective, this is yet another evidence that markets, just like any other social institution, do not exist in a baboon society. That is, materiality, in general, and tools and devices, in particular, are delineating and indeed, shaping social interaction. There is at least one more insight to be gleaned here, though. It is true that physical space is reintroduced to markets through the relocation that comes along with HFT, but something much more important is being introduced to market with it: the rich, nuanced information that used to be the lifeblood of face-to-face trading and the infrastructure of liquidity supply is now communicated electronically.

This last point is kind of subtle, but it's interesting to think of algorithmically-executed orders as a form of "rich, nuanced information."

So what can we conclude? Place still matters because there's money to be made in occupying distinct physical locations; and it matters even in electronically-driven finance because, at bottom, this is still a physical activity: while it's easy and fashionable to think of modern finance as just a bunch of digitized signifers, the reality is that those zeroes and ones exist on servers, move through Ethernet cables, and are analyzed and responded to by software sitting on computers. Under some conditions we can ignore all that; but the fact is that even in the most information-intensive, abstract activities, materiality is still there.

[To the tune of Isabelle Antena, "Nothing To Lose," from the album Versions (I give it 2 stars).]

© 2019 Alex Soojung-Kim Pang, Ph.D.

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