Monthly Archives: February 2012

Speed Traders Are Approaching Speed of Light – And Beyond

As you read this, a gigantic fiber optic cable is being put in place, right across the Atlantic, from the UK to  the US, so that high speed trading robots can save 5 millisecond on their communications. At the same time a new computer chip is being launched that are able to prepare trades in 740 nanosecond. Faster than you are able to blink your eye, faster than you are able to think…

“The downside of society’s continuing drive toward larger, faster, and more interconnected socio-technical systems such as global financial markets, is that future catastrophes may be less easy to forsee and manage –  as witnessed by the recent emergence of financial flash-crashes.”

Neil Johnson

With computers able to work faster than the speed of light, we are giving away the power to control our own lives. No human brain is able to think faster than 1000 nanoseconds, US researchers points out in a new paper as they reveal signs of the financial markets transforming into a machine-dominated phase that eventually will end in disaster.

Here’s a summary of what the paper says:

  • Society’s drive toward ever faster socio-technical systems, means that there is an urgent need to understand the threat from ‘black swan’ extreme events that might emerge.”
  • “On 6 May 2010, it took just five minutes for a spontaneous mix of human and machine interactions in the global trading cyberspace to generate an unprecedented system-wide Flash Crash. However, little is known about what lies ahead in the crucial sub-second regime where humans become unable to respond or intervene sufficiently quickly.”
  • “Here we analyze a set of 18,520 ultrafast black swan events that we have uncovered in stock-price movements between 2006 and 2011.”
  • “We provide empirical evidence for, and an accompanying theory of, an abrupt system-wide transition from a mixed human-machine phase to a new all-machine phase characterized by frequent black swan events with ultrafast durations (<650ms for crashes, <950ms for spikes).”
  • “Our theory quantifies the systemic fluctuations in these two distinct phases in terms of the diversity of the system’s internal ecology and the amount of global information being processed.”
  • “Our finding that the ten most susceptible entities are major international banks, hints at a hidden relationship between these ultrafast ‘fractures’ and the slow ‘breaking’ of the global financial system post-2006.”
  • “More generally, our work provides tools to help predict and mitigate the systemic risk developing in any complex socio-technical system that attempts to operate at, or beyond, the limits of human response times.”

The paper is authored by a team of physicists, engineers and industry data experts, led by Neil Johnson from University of Miami.

It is charmingly entitled:  “Financial Black Swans Driven by Ultrafast Machine Ecology” 

The scientist describes the developments as “approaching singularity.” 

It is plainly the point in time from when computers are able to calculate, react and perform faster than any human being.

And it’s a point we obviously are about to reach:

“… a new dedicated transatlantic cable is being built just to shave 5 milliseconds off transatlantic communication times between US and UK traders, while a new purpose-built chip iX-eCute is being launched which prepares trades in 740 nanoseconds …”

Johnson and his colleagues ask the question of whether today’s high-frequency markets are moving toward a boundary of speed where human intervention and control is effectively impossible:

“The downside of society’s continuing drive toward larger, faster, and more interconnected socio-technical systems such as global financial markets, is that future catastrophes may be less easy to forsee and manage –  as witnessed by the recent emergence of financial flash-crashes. In traditional human-machine systems, real-time human intervention may be possible if the undesired changes occur within typical human reaction times. However,… in many areas of human activity, the quickest that someone can notice such a cue and physically react, is approximately 1000 milliseconds (1 second).”

www.betabeat.com writes:

“Notwithstanding this biophysical limitation, the strategic advantage to a financial company of having a faster system than its competitors is currently driving a billion-dollar technological arms race to reduce communication and computational operating times down toward the physical limits of the speed of light – orders of magnitude below human response times.”

Physics of Finance and blogger, Mark Buchanan, writes:  

” This just illustrates the technological arms race underway as firms try to out-compete each other to gain an edge through speed. None of the players in this market worries too much about what this arms race might mean for the longer term systemic stability of market; it’s just race ahead and hope for the best.”

So, to summarize: We now have machines that are moving big chunks of money around faster than our eyes can blink, faster than our tiny brains can comprehend, with the potential to cause crashes that are so lightening-quick they can neither be anticipated nor corrected before causing systemic trauma – because traders are still really fast at panicking.

Just great!

Here are some other highlights – enjoy:

“… our data set shows a far greater tendency for these financial fractures to occur, within a given duration time-window, as we move to smaller timescales, e.g. 100-200 ms has approximately ten times more than 900-1000 ms.”

“The presence of humans actively trading — and hence their ‘free will’ together with the myriad ways in which they can manually override algorithms — means that the effective number (i.e. α > 1). Moreover α > 1 implies m is large, hence there are more pieces of information available which suggests longer timescales…  in this α > 1 regime, the average number of agents per strategy is less than 1, hence any crowding effects due to agents coincidentally using the same strategy will be small. This lack of crowding leads our model to predict that any large price movements arising for α > 1 will be rare and take place over a longer duration.”

“Our model therefore predicts a rapidly increasing number of ultrafast black swan events as we move to smaller α and hence smaller subsecond timescales – as observed in our data.”

Download paper.

Related by econoTwist’s:

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Filed under International Econnomic Politics, Laws and Regulations, Philosophy, Technology

Our Daily Warning

As the government of Romania falls as another victim of the economic crisis, the global political risk factor continue to rise and the odds of even more social unrest gains a few more percentage points. EconoTwist’s and many bloggers , analysts and researchers,  have been warning about this for years. But perhaps it’s time for another warning?

 “With people already questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse.”

Edoardo Campanella

Romanian Prime Minister Emil Boc on Monday announced his resignation after three weeks of anti-government protests in the country, following in the footsteps of Giorgio Papandreou and Silvio Berlusconi.

He said he took this decision in order to calm “social tensions” and so the “economic stability of the country” is not affected.

Well, the resigning of the PM’s in Greece and Italy doesn’t seem to have helped much in that matter.

See: World Erupts in Anger: “You Can’t Eat Money!” (Photo Coverage)

It seems more like political leaders fleeing from their responsibility.

And if someone don’t claim that responsibility soon, and start doing something about it, we may very well find ourselves in a helluva lot more trouble than we’re already in.

ReadEurope: “Time to Get Angry”

In case there is still anyone who not quite grasp the depth of this crisis, here’s the adviser for the Italian senate, Edoardo Campanella, to explain:

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The Social Consequences of the Euro Crisis

About a year ago the Arab spring taught the world an important, predictable lesson. When young people cease to be the engine of the economy and are excluded from the decision-making process, long-run economic growth is endangered and political stability undermined.

This lesson holds true for dictatorial regimes as well as for long-established democracies.

In Europe, a deteriorating youth marginalization is creating the preconditions for a social earthquake capable of shaking the old continent and impairing the survival of the Euro.

Until now, safety nets and intra-family transfers have prevented peaceful Indignados-style protests from turning into violent Arab-ones.

However, the shortfall of resources due to a new imminent recession, along with fiscal austerity measures, will impair this channel, whereas frustration and social resentment will keep growing

The figures are already alarming.

According to a report recently released by the European Commission, one in five young people is at risk of falling into poverty or social exclusion, only one third of young people are employed, and one in three has been out of work for over one year.

Moreover, 40 per cent of the unemployed are under 30, to the amount of 9 million people. On the other extreme of the age scale, the trend is reversed.

The employment rate for people aged 60-64 increased from 23% in 2000 to 34% in 2010.

In peripheral countries the situation is extremely acute.

The Portuguese government urged its young unemployed to leave Europe for better opportunities elsewhere, in Italy almost 120.000 young talents left the country last year, and in Spain thousands of people are pouring into former colonies in South America.

Across Europe, and even in Germany or Sweden, young workers are experiencing in-work poverty due to what economists call labor market dualism.

Unlike their older colleagues, they just have access to temporary contracts, which pays on average 14%  less than permanent contracts and are more vulnerable to sudden layoffs.

The medium-term economic and social consequences of such youth marginalization are huge.

  • First, an economy that is not nourished by fresh ideas loses competitiveness, becomes vulnerable to interest groups, suffocates material as well as intellectual progress, and is fated to stagnation or even prolonged recessions.
  • Second, high income volatility and job insecurity discourage the creation of new family units that are essential to generate social cohesion as well as inter-generational solidarity.
  • Finally, economic uncertainty tends to lower fertility rates with negative spillovers on the size of tomorrow’s workforce, population ageing, and the sustainability of public finances. The political implications could even be more disastrous.

Therefore, what begs asking is whether these economic factors could contribute to the eruption of an Arab spring in Europe.

There are, of course, huge economic and political differences between North Africa and Europe. The latter, unlike the former, is graying, prosperous, and democratic. But, paradoxically, the combination of these diverging demographic trends and opposite institutional features, along with the same aspiration for a better future, could lead to an identical result.

In North Africa young people represented the demographic majority of a despotic regimes, in Europe the political minority of a democratic system.

The former fought for an economic progress they just started to savor but that was hampered by the elite in power. The latter would fight for a material wellbeing that is only benefiting their older fellow citizens at their expenses.

Either way, young people can improve their situation and gain power only through violent rather than legal channels.

What event, if any, will inflame the upheaval in Europe, which country will be the epicenter of this social earthquake, and what impact it could have on the institutional, democratic order remain uncertain.

However, it is still possible to predict part of the effects.

With people already questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse.

Edoardo Campanella

To avoid this catastrophe, European governments should start promoting the role of the youth in their societies through family friendly policies, career paths related to productivity rather than to seniority, cross-country mobility, and the eradication of dual labor markets.

Spring is approaching. European leaders should act soon.

Edoardo Campanella is economic adviser to the Italian Senate.

This article is syndicated by www.eurointelligence.com.

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Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Philosophy

Global Markets Mental Health Test

After Friday’s mega jump in the US stock market, the expression “irrational exuberance” just doesn’t cut it anymore. Even if last week’s unemployment number should be an indicator of recovery for the US economy – which is doubtful – it is not a valid argument for sending the Nasdaq index to a 11 year high. This behavior has more in common with bipolar disorders than anything else. Europe‘s regulators now want to stress test the stock markets and the electronic trading platforms in the same way they’ve (relatively) successfully stress tested European banks in the past. Well, let me remind you that stress,  in general terms, is regarded only as a symptom of something else.

“Here it is; the first ever Global Markets Mental Health Test!”

econoTwist’s

But let me point out that there are per definition two kinds of stress – the biological kind and the mechanical kind. I’m not 100% sure, but I think the famous bank stress tests is of the mechanical type. So it may be quite possible that the authorities are missing vital facts about the stressed-out banks by disregarding the human factor. 

As reported by Tim Cave from Financial News.Com, a number of industry practitioners have called on European regulators to force exchanges and alternative trading platforms to adopt stress-tests, in a bid to improve their resilience to large-scale shocks, volatility and the rise of high-frequency trading.

While the concept of stress tests has become common in the banking sector after the financial crisis, and measures are also being implemented to simulate the resilience of clearing houses in times of stress, no similar measures have been suggested for trading venues.

Speaking at a high-frequency trading conference in Paris yesterday, Carlo Comporti, a director at regulatory consultancy Promontory Financial Group and former acting secretary-general of the European Securities and Markets Authority, said that needed to change, fiercefinance.com reports.

Bipolar Markets

However, both mechanical and biological stress have one thing in common; its a symptom that something isn’t right.

The actual problem is usually far more difficult to identify.

But with the recent market volatility in mind – here’s the clinical cognitive symptoms of stress:

  • Memory problems
  • Inability to concentrate
  • Poor judgment
  • Pessimistic approach or thoughts
  • Anxious or racing thoughts
  • Constant worrying

To me, that pretty much sums up the market sentiment at the moment.

And the similarities between biological and mechanical stress are fascinating.

“Biology primarily attempts to explain major concepts of stress in a stimulus-response manner, much like a how a psychobiological sensory system operates.”

(Source: Wikipedia)

A Market Mental Health Test

It’s also common knowledge that stress can be a symptom of a mental disease or disorder, as well as long-term stress is known to cause mental problems.

However,  to my knowledge there has never been a mental health test for the financial markets (and I’m not sure if there ever will be).

So, I have put together some free online tools that might be helpful in determine what kind of stress the stock market (and the banks) is struggling with, and give us a clue to what is the real and underlying problems.

 Here it is; the first ever Global Markets Mental Health Test!

TEST 1

Do you have a mental disorder?

(Take the test)

TEST 2

Which mental disorder do you have?

(Take the test)

TEST 9

Are you schizophrenic?

(Take the test)

TEST 4

Do you have a borderline personality?

(Take the test)

TEST 5

How depressed are you?

(Take the test)

TEST 6

How manic are you?

(Take the test)

TEST 7

How well do you manage your anger?

(Take the test)

TEST 8

Do you have a alcohol or drug problem?

(Take the test)

TEST 9

Are you addicted to cybersex?

(Take the test)

TEST 10

Are you a workaholic?

(Take the test)

TEST 11

Do you have  obsessive-compulsive disorder?

(Take the test)

TEST 12

Are you a retard?

(Take the test)

Please take the time to answer the poll:

Those of you with muliple personality, please fill in this one, too:

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Filed under International Econnomic Politics, National Economic Politics, Philosophy