28 Apr

The rise of the machines: the risks of robots in financial markets

rise of the machines

Introduction

The title of this article is borrowed, in part, from the third instalment of the Terminator movie franchise, released in 2003. The movie tells the story of a robot that returns to the year 2018 from a post-apocalyptic world with intent to destroy humanity’s ability to stand in the way of a future ruled by hostile machines by taking control of world’s computer systems. Far fetched? Perhaps, but there are some interesting similarities to that storyline with what researchers and market watchers are starting to observe looking at the gyrations taking place across the world’s financial markets over the past few years.

‘Flash’ Crashes

In May 2010, all the key US market indices experienced a massive collapse and then a swing to recovery, close to previous levels, in little more than half an hour. All this happened in the early hours of the morning before the trading floor was even open. The Dow Jones in particular experienced a loss of 1000 points in just a few minutes, equating to trillions of dollars in value. In 2013, a similar crash was experienced on the Singapore exchange that lost nearly US$7 billion in market capitalisation over 3 days. More recently in August 2015, another flash crash took place in the US with another 1000+ point drop precipitated by sell-offs in China and index drops in Europe prior to the opening on trade in the US. Major stock markets are not the only ones affected. At the start of 2016, Bloomberg reported on the flash crash of a 10% drop in the value of the South African Rand in the matter of minutes of one morning.

There is a lot of speculation as to the causes behind these changes from highly publicised examples of individual rogue traders all the way through to the panic-induced retail investor. As debates have evolved and research has discovered, there is an increasingly common denominator starting to emerge. A CNBC report from January 2016 recognises the US trading regulator CFTC’s (Commodity Futures Trading Commission) findings that “One of the key connections is the rapid placement and withdrawal of trading orders that lies at the core of high frequency trading (HTF)…this activity was at least significantly responsible for order imbalances in the derivatives market, which in turn affected the stock market.”

The Rise of the Machines

So where are the evil robots? The same CNBC report goes onto point out: “These crashes are caused by institutional trading from exchange traded funds (ETFs) and HFT. They are not caused by mums and dads trading because mums and dads simply do not act in such a coordinated fashion in such a short timeframe. Mums and dads also do not have the leverage to shift markets in this way within 30 minutes or an hour. That power lies in the hands of large-scale derivative traders.”

Large scale derivative trading is an increasingly automated process. Traders, ultimately human decision-makers, develop and instruct automated systems to make decisions on their behalf in times, places and frequencies that would not be humanly possible. Powerful institutions equipped with the capital, skills, information and infrastructure seek and extract return across global capital markets. As has been identified, the losers in this war are the retail investor and those institutions that are unable to compete with the sophistication and speed that these powerful robots have at their disposal.

It is not the robots that are evil, it’s the set of rules and algorithms that determine their behaviour to buy or sell that are the real problem. These rules do not apply discretion beyond what they are coded to do. Scarily, they are able learn by these rules and market movements to serve their masters for effectively and efficiently in future. Unsurprisingly, it’s the masters of the machines that stand accountable.

A relational view on robotic trading

The world’s financial markets are a clear example how relationships between nations, regions, industries and asset classes can impact each other through complex interconnections. Robotic trading is a mechanical attempt to identify these connections and derive an information advantage in a market to deliver financial return by trading assets based on rule-based assumptions. Essentially, this mechanical process looks to transform the observed dynamics of a relationship into a tradable transaction for gain for those who command it.

The unsettling reality is that investigators and researchers still do not know to what extent robotrading affects the world’s markets because of the pervasiveness of systems and the herding effect that they induce when it comes to other institutional investors trying to follow the lead of their more sophisticated peers. What is clear though, is that there are casualties in the process. Mums and dads do not have the speed and information to make decisions like robots do, but there still remain many millions of families across the world that invest their savings into markets to pay for school fees, retirement and rainy days. Attempting to make sense of market information so skewed by machines can be a fearful and potentially fruitless pursuit.

Colin Habberton is CEO of PayProp Capital in Stellenbosch in South Africa. Before that he was CEO of the GivenGain Foundation South Africa (GGFSA).

28 Apr

Where does capacity come from?

Capacity
“Don’t tell us we need to change. We can’t: we are already working beyond our capacity.”

“I don’t even have time to think about whether I shouldn’t be doing this.”

“I will think about doing that when I get the chance.”

There should be a fundamental difference between a group of a hundred individuals and a well-functioning organisation of the same size. Yet when individuals are working at their capacity, a hundred people can look like nothing more than a hundred people. Organisational capacity is created by good working relationships and the fluid connections they make.When an individual is working at full capacity, any curve ball, any change request, in fact anything extra, will be treated as a distraction. Even an offer to take some of their workload requires a decision, a hand-over and co-ordination. Adding more people requires all that, plus training and orientation. At full capacity, therefore, individuals become bound to do things that someone else might be able to do more effectively and efficiently.

Effective, efficient organisations realise that investment in relational connections is fundamental to building organisational capacity. Relationships are required to enable the right people to do the right things at the right time. Stop and think about that: without the right relationships, it is likely that the person, activity or timing will be wrong. Inefficiency and reduction in output follow.In order to make change happen, capacity must be used to build relationships and maintain them. Thus, ironically, in order to be in a position to increase the overall volume of work, it is necessary to be working at less than full capacity. If your organisation is already at full capacity, it becomes extremely difficult to create the relational space necessary for change.

Once an organisation has the space to change it will need to recognise the specific issues with their current relationships, address them and manage ongoing improvements to the way they relate. If relational issues are not addressed, inefficiency in engagement and connection will unnecessarily absorb an organisation’s precious capacity.

When someone in your organisation is failing to deliver (or your whole organisation is failing to deliver) it may well be that you have a capacity problem. In that case, improving working relationships is a great place to start in bringing the availability and capability necessary to increase capacity.

This article was originally published by Renuma, one of our member organisations, and is republished here with their permission.

16 Jan

Relational Living (2): World Peace

World Peace (2)

CAMBRIDGE – By Simon Fowler –

“Social Networks are fundamentally connected to goodness, and what the world needs now is more connections.” – Nicholas Christakis

“I believe that the more time we spend choosing to run the deep inner-peace circuitry of our right hemispheres, the more peace we’ll project into the world, and the more peaceful our world will be.” – Jill Bolte Taylor

“When people of all different persuasions come together working side be side for a common goal, differences melt away and we learn amity and we learn to live together and to get to know one another.” – Karen Armstrong

I have a contrarian side to me, and whenever I see hyberbole like this my snarky side switches on. Besides, I’m wikid tired right now so I’m not in my usual upbeat and bright-side mood.

Relational Proximity® Dimension #5 is ‘Overlap’: Our sense of connectedness and relationship is greater to the degree we have things in common or share a common purpose or identity. A good relationship has a direction to it, something that is common between the members that holds it together.

There’s rarely been a TED (www.ted.com) talk I didn’t enjoy and which didn’t fascinate me. It’s a great platform, wonderfully presented, and the technology, the discovery or the personal experience is invariably gripping and exciting. And what they’ve done to spread the ideas and concept is excellent. It has been accused and defended of elitism. Personally, I think it’s a fantastic way to make use of rich people’s money and to spread great ideas. If anything, however, the problem is that the speakers just can’t seem to help overstating their point. With an audience paying six grand a pop, just 20 minutes to pour out your life’s work, the spotlights … I can’t say I wouldn’t do the same.

But I also think they and their audience actually might believe their overstatement. Unfortunately the overstatement takes the talks from being mostly excellent, scientifically grounded and true-to-life to, well, amazingly utopian wishful thinking. (I speak as an idealist myself).

Jill Bolte Taylor’s amazing description of watching her own brain have a stroke (truly, jaw-droppingly amazing) ends with an apparent choice between left brain individualism or right-brain universal life-force. My emotional & violent right brain freaks me out sometimes. And what part of the brain is the ‘we’ that’s doing the choosing anyway? Nicholas Christakis asserts that connections will solve the world’s problems. Connections like the Stazi had? Like the world banking system had?

And Karen Armstrong’s talk seems grounded neither in anthropology nor anything like a robust theology. The ending actually I agree with (“get to know each other” would presumably comes first – I’m sure it wasn’t her best line, she looked exhausted). But the ‘common purpose’? It’s the “Compassion Charter” signed up to by 46,179 compassionate people so far. Sorry if you’re a fan but isn’t the problem uncompassionate people?? And I don’t want differences between me and others to go away, I want them transcended. I’m not saying we couldn’t do with more love, but not even the Ten Commandments prevented human ingenuity for evil. A group of people simply agreeing to be more compassion isn’t, I’m desperately sad to say, going to solve our deepest problems. I totally commit to be being more compassionate. Then another day happens. As Solzenitsyn said, “the line separating good and evil passes not through states, nor between classes, nor between political parties either, but right through every human heart, and through all human hearts. This line shifts. Inside us, it oscillates with the years. Even within hearts overwhelmed by evil, one small bridgehead of good is retained; and even in the best of all hearts, there remains a small corner of evil.”

I love and appreciate the longing for peace and goodness and love in these people and in their statements. The confirmation of relational proximity found in these social science, neuroscience and and humanistic statements I wholeheartedly welcome. But, firstly, mere ‘relational proximity’, socially networked togetherness, isn’t the whole answer; it just points the finger more acutely on the problem.

The five dimensions of Relational Proximity® (Touch, Time, Breadth, Overlap, and Balance) are nothing without love and commitment, and love and commitment can barely consist without them. That’s why Relational Proximity® I think is so powerful, and so much more powerful than nebulous ‘social networks’. If used to examine our lives, I think it reveals the reality of our choices and our relationships. Secondly, the understanding that these connections are FOR something is crucial. What is the common purpose or ‘overlap’? Christakis says in his video that our global human network is a super-organism, it has a life of its own. I think world peace and compassion are good goals, but I actually think they’re penultimate; they’re derivative of something bigger, something, perhaps Someone more creative and dynamic and Personal.

And that is way too much thinking for one night. Find some time to see all three videos mentioned in this blog and let me know what you think?

In the series Relational Living, Simon Fowler explores what Relational Thinking means in our day-to-day lives. The articles appeared earlier on his personal blog and are republished with his permission. The first in this series was published on 9 January.