Nanex, the market analysts who like to create visual representations of the markets, have animated half a second of trading activity in Johnson & Johnson stock. The results are quite intoxicating to watch:
To us it almost looks like an organic nervous system in action.
Which makes us wonder, is this really as bad a development as HFT’s critics make it out to be?
Cue a research paper just released by Tom Lin of the University of Florida. He argues that it’s no coincidence that “modern finance is becoming an industry in which the main players are no longer entirely human. Instead, the key players are now cyborgs: part machine, part human. Modern finance is transforming into what this Article calls cyborg finance.”
Call it the dawn of Cyborg finance, or “Cy-fi” as he calls it for short.
A few choice extracts from his paper (our emphasis):
In sum, increased reliance on computerization and artificial intelligence in finance has fundamentally transformed modern finance into cyborg finance, an industry that is faster, larger, more global, more interconnected, and less human than its previous iterations.
The transformation of modern finance into cyborg finance has precipitated a conceptual evolution in prevailing legal understandings of financial regulation’s main character: the investor. With the aid of computers, a new aspirational in- vestor paradigm has emerged and holds the potential to be more informed, more diversified, more rational, and faster than previous paradigms. And law must become more cognizant of this emerging, new investor paradigm in order to remain effective.
Fifth, compared to the other models, the new investor is more humble about its capabilities and knowledge. While the new investor possesses more knowledge and investing capabilities relative to its predecessors, the new investor is also more mindful of its limitations, the limitations of models, and the limitations of technology. The new investor is more aware of the role of randomness, serendipity, and uncertainty in life and finance. The new investor has a vast library of data and information but also has a vast antilibrary: a collection of known unknowns and unknown unknowns; a repository of unlearned knowledge. The antilibrary tempers the new investor’s confidence in its capabilities and knowledge as it relates to financial markets.
We do wonder what Nassim Taleb would make of the anti-library concept and its effects on risk…
Though as Lin puts it, it’s really about the perils of being “too linked to fail”:
Modern finance exists as an expansive, interconnected network that crosses institutions, industries, states, and products—creating a systemic problem that this Article terms “too linked to fail.” In the age of cy-fi, commercial banks, investment banks, hedge funds, mutual funds, pension funds, private equity firms, nation-states, wealthy traders, and a host of other players and institutions are all bounded together as part of this growing financial web of mutuality. And within the mesh of that financial web are financial products that have also grown more linked to one another.
Another thoughtful point from the paper: Cyborg finance means there are, in some ways, no borders anymore:
Whereas in eras past the failure of one financial institution, one sovereign treasury, or one financial product was largely and better contained by geography, cyborg finance has obliterated all borders and boundaries. The financial problems of one nation-state can now affect all nation-states like never before.
But, as Lin’s conclusion hints, perhaps it’s just the next phase in Darwinian evolution anyway?
The telos of technology is not to render us useless but to aid us in our progress andevolution. This is the very nature and “perfection of man.”Just as the spear, the wheel, and the printing press aided our predecessors in the past, the computer, its memory, its speed, and its programs will aid us in the future. And so we must build new constructs—legal, financial, and others—to harness the potential of this transformative technology while taming its hostilities. In the end, this is the challenge, the promise, and the hope of the new investor.
Robots, employment and sector safety – FT Alphaville
Beyond scarcity series and Leisure Society tumblr – Izzy
The robot employment threat – FT Alphaville
Obama must face the rise of the robots – FT