Peter Cochrane's Hard Drive 1996
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The Infinite City
Only a decade ago just over 170 individual dealing rooms employed thousands in the City of London. Eye contact, face-to-face interaction, telephones, and paper were the medium. Few could envisage the death of this system, until the big bang of October 1986. The liberalisation of the market and a global computer based trading left the floors deserted. Screen trading was a revolution that changed the nature of money markets forever. The first lesson of the big bang was predicted by many with just a modest appreciation of system dynamics. Delay and synchronisation in similarly distributed systems, rapidly forces them into limit cycles as delay is diminished. In non technical terms: trading systems go into a chaotic buy, sell, buy pattern - and delay had to be put back in to restore stability.

In 1986 PhDs were rare in the City, but today dealing systems have become rocket science. The reason, whoever has the best communications, computers, and algorithms has the edge. Despite all their apparent sophistication, the majority of human traders use a decision process that is simple, and amazingly successful. As shares go up, they assume they will continue to go up until they turn down, and then continue to go down until they turn back up again. Couple this with knowledge and intuition, and you have a world-class trader. Computers with algorithms based on this approach are relatively successful, and make money but need more intelligence to compete.

Today?s leading edge systems use artificial intelligence to buy and sell across global markets. These algorithms learn from experience and predict what should happen, analyse the results, and adjust to improve. In reality these are simple animals, but then simple animals such as ants are able to achieve remarkable things that humans find impossible.

So we may soon see traders being replaced by computers guided by very few people. So far, machines don?t commit crimes, rarely make mistakes, are non-emotional, and truly objective. They can work 24 hours a day, 365 days a year, and are totally dedicated. So what might be the next step for the already metaphoric City? Perhaps screen-based trading rooms will also become museums.

If we are working from screens we don?t have to be in one room - or be a part of the same company. As in many other sectors working from home or telecottage is an obvious next step and signals the fragmentation of the industry. To realise such freedom requires us to recognise that we are now witnessing the death of geography, the birth of universal information access, and world-wide round the clock working. Instant communication compresses distance, and eradicates time zones. Why do London, Frankfurt, New York, Tokyo all have stock exchanges? In an electronic world they will just be information space - without physical location - the infinite city.

Moving from the trading floor to the electronic dealing room saw a phenomenal shrinkage in people numbers, and change in the skills required. In the next phase it will be the hybrids - the technologist, banker, marketeer, and trader who will lead. And the ultimate question: how clever will we have to be to outstrip automatic trading systems in 20 years time? Probably more intelligent than our wetware (brain) allows. What we perceive as random is often chaotic, and chaotic events have patterns which we are good at spotting. This is the basis of human trading systems. The machines? advantage is their ability to take a wider perspective, recognise short term patterns faster, and continuously examine the outcomes of all previous moves. In short - they are smarter than us!
Peter Cochrane holds the Collier Chair for the Public Understanding of Science & Technology at the University of Bristol. His home page is:
http://cochrane.org.uk

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