scotartt on Sat, 25 Sep 1999 19:48:54 +0200 (CEST) |
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<nettime> some observations on the bias of financial networks |
Felix, 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 liquidity. 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'! regs scot. -- >}} 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@bbs.thing.net and "info nettime-l" in the msg body # archive: http://www.nettime.org contact: nettime@bbs.thing.net