Tuesday, 4 September 2012

Dark Pools and High-Frequency Drones

It will be very interesting to see if Philip Mirowski, author of Machine Dreams: Economics Becomes a Cyborg Science, decides to update his thesis in light of Scott Patterson's new book, Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System. Or perhaps Mirowski might just write a review instead. I haven't read the book yet myself, so I can't comment on whether Patterson's thesis itself presupposes technological determinism, but journalists are certainly quick to resort to it when characterising Patterson's arguments. The Sydney Morning Herald's Paul Sheehan, for example, argues that "regulators are always caught in the wake of technological change. This wake has grown into a froth as the computer age keeps accelerating its own evolution (emphasis mine)".

And there's a viscosity in the imagery quoted from the book, somewhat reminiscent of The Terminator, which speaks in terms of ''a worldwide matrix of dazzlingly complex algorithms, interlinked computer hubs the size of football fields, and high-octane trading robots guided by the latest advances in artificial intelligence''.

For Sheehan, the upshot of all this is clear:

"At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. By last year, it was 22 seconds. By now it will be as long as it takes to read these first two paragraphs...This evolution includes the ''dark pools'' that gave Patterson the title of his book. They are giant pools of liquidity which financial institutions use to trade with each other, outside the sharemarkets, to avoid the preying Bots that seek to exploit any large trade. Dark pools are also an attempt to create stability. As Patterson writes: ''Insiders were slowly realising that the push-button, turbo-trading market in which algos battled algos … at speeds measured in billionths of a second had a fatal flaw … a vicious self-reinforcing feedback loop … Because speed traders had pushed aside more traditional long-term market makers … algos could trigger their own form of self-reinforcing mayhem.''

But if such systems are portrayed as autonomous, then any attempt to regulate them risks appearing a hopelessly dated and defeatist humanist gesture. This is where Patterson's work could reinforce the posthumanist presuppositions of Luhmann's theory and dovetail with Knorr-Cetinna's thesis of the "post-social" environment inhabited by traders. So this book is a reminder of why we have to make sure our social theory does not become too complicit with its object of analysis, without sacrificing any of the complexity needed to adequately address emergent social phenomena. I can't see that this need be too difficult though, especially when Patterson states that his thesis is postmodern:

''With electronic trading, a placeless, faceless, postmodern cyber-market in which computers communicated at warp speed, that physical sense of the market's flow had vanished. The market gained new eyes - electronic eyes …"

Social theory and sociology have been dealing with postmodernists now for more than twenty years, and have proven, contra Baudrillard, that reports of the "death of the social" have been greatly exaggerated. So I feel confident that a new generation will be able to rise to this latest challenge as well.

One final thing, be sure to watch the clip I've posted here till the end, because it concludes with some interesting speculations about the future applications of drone technology. Drones legally become available for commercial use in the United States in 2015.

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