Nettime mailing list archives

<nettime> some observations on the bias of financial networks
scotartt on Sat, 25 Sep 1999 19:48:54 +0200 (CEST)

[Date Prev] [Date Next] [Thread Prev] [Thread Next] [Date Index] [Thread Index]

<nettime> some observations on the bias of financial networks


Just read your essay on financial markets in the nettime README! book.  Of
course I remember reading something like it in my inbox when it was posted
(though I can't find it now to cut and paste the quotes) but now I guess I
can add some thoughts to it based on my 9 months experience working for a
futures broking company (well, the technology arm of such anyway).  These
are just scattered observations, not a wholistic treatment like your
essay, which I think is essentially correct in its observations about
networks and social conditions thereof. 

First a couple of minor corrections: one that 'derivatives' are not wholly
electronic -- futures are one form of derivative -- these have been traded
since last century. Derivatives include options -- both options on futures
(a derivative of a derivative) and options on the physicals (i.e. the
underlying cash market representated by the futures contracts and other
cash markets not traded on futures markets). You explain the Option and
advanced concepts like Arbitrage but also I think you should also explain
the Futures contract (a -binding- promise to sell or buy a particular
commodity at a set date in the future at a price agreed today -- the
option is a non-binding promise), given that much of what you refer to is
really about Futures trading (although most of the volume in currency
speculation are typically 'Over the Counter' forward markets, not Futures
markets per se). Futures speculation, the first type of commodity
abstraction (apart from currency) primarily dates from last century
although it has antecedents that are over 400 years old (Dutch Tulips
being the most quoted example). 

In regard to the self-referntiality of markets, which is what I really
wish to address here, there is another level of self-referentiality
inherent to market activity which you don't canvas, and would have
bolstered that argument considerably. You speak of what is called 'the
fundamentals' -- i.e. the news and other information (eg weather) which
traders view as 'fundamentally' influencing the market. I.e. a poor wheat
crop makes the wheat cash market and its corresponding futures contract
price go up, because wheat is rarer, this type of news is "fundamental" to
the price of wheat. You contextualise this information flow as "The
markets as a closed system react to news because the dealers [ ... ]
expect each other to react react and each tries to react before everybody
else". Which is true as far as it goes.

However there is another, even more highly evolved form of
self-referentiality in dealer/trader activity which __ completely ignores
external events such as news, (usually) using only information generated
within the network itself ___. In short, this is called 'the technicals'
or Technical Analysis (TA). This is the belief that future price is
determined by one fact only - historical price. People who believe in the
technicals are called 'technicians' or 'technical analysts' or just TAs. 

TAs typically have a system, usually mathematical in nature, but really
any system will do (that includes Astrology, the cricket scores, and our
friend the Swedish yucca plant), which they correlate past price
performance to produce indicators for the future price. Chaos theories,
for example, are excellent predictors of price action. Typically as well
as price you might look at trade volume, and time factors, the identities
behind the bid and offer, and the like -- all information generated wholly
within the market itself. This type of trading can be highly successful. 

Which brings me to another point. I think you should really distinguish
the types of player in the market. One one hand, there are 'hedgers' --
typically either producers or traders of physical market, and
'speculators', ie people who take on the risk (that the hedgers wish to
offload) in order to realise a potential profit on the trade. The
speculators are an integral part of the market system because they provide
'liquidity' i.e. price movement. Otherwise the hedgers would all be stuck
on mostly the same side of the market (ie buying or selling)  and the
market would not be 'free' to find the price most acceptable to market
participants (price discovery). Banks and 'institutional players' can be
either kind but really they are the 'market makers' typically because only
such institutions have the _volume_ (cash reserves to make really big
trades) to make a significantly long term difference to the market

Hence, in many technicals, what you are trying to find are the limits to
institutional activity -- the "price bracket" at either ends of which the
big institutions (i.e. the volume) either en-masse occupy only one side
(buying or selling) or basically refuse to get in the game at all.  The
former situation, if you can predict with your TA, is what the speculator
is looking for -- big one way movements (either buying or selling) which
if you can jump on very early, you can ride all the way until the next
price bracket establishes itself (i.e. the market reaches "efficiency", or
the optimum invariant price). The oscillation within the price bracket is
usually quite chaotic fluctuation -- another feature that can be exploited
by TA (identify the bracket then buy the low, sell the high) -- but it is
the 'reconnections' (or chaotic bifurcations) between price brackets that
deliver the really big trading profits (or huge losses if you are caught
on the wrong side!).  These brackets can be seen on any number of
time-scales because of the chaotic paradigm of self-similarity. So you can
see it as intra-day activity, or on the time scale of days, weeks, and
even years. That depends on the trader's choice of trading style. 

I mention all this because there is a fundamental feature that the new
electronic networks typically __lack__ : identification of the player's
identities. Well, they are identified, but only after the daily close, not
quickly enough in today's fast-moving "day trader" environment. You
mention the CBOT's clearing house being the first (in 1874) but that it
was "only the network conditions raised this institution to its current,
central importance", but here's where I have to disagree. Firstly, the
Board of Trade __had__ a network right from the start: it was the trading
pit -- that place where all those guys shout and wave their hands at each
other. This __human network__ provided instantaneous information on market
participation (the colour of the jackets) and whenever the instutions
started to move (literally) the traders could see it coming from the pit
as first the phones in the instituional areas went off, then the
instituional traders flood into the pit and start putting on their bids
and offers. Electronic markets "change the rules of the game" and this
information is not so easily gleaned. Further systems will be required to
provide this information in an easily digestible human form from an
electronic network. A point well worth a mention because it is precisely
the Chicago Board of Trade that will practically be the __last__ global
exchange to go fully electronic, as the floor traders there have an
inordinate amount of control on the Board. They like their 19th century
network -- many of them are well attuned to its many nuances and don't
particularly like the thought of being 'screen jockeys'! 


>}} sysx sysx.apana.org.au sysx.autonomous.org autonomous.org {{<
    "It's like a record needle cuts a groove into the brain."
>{{ http://autonomous.org/soundsite http://mp3.com/nerveagent }}<

#  distributed via <nettime>: no commercial use without permission
#  <nettime> is a moderated mailing list for net criticism,
#  collaborative text filtering and cultural politics of the nets
#  more info: majordomo {AT} bbs.thing.net and "info nettime-l" in the msg body
#  archive: http://www.nettime.org contact: nettime {AT} bbs.thing.net