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Preprints & Reprints THE INFINITE CITY For centuries the nations money house has been the square mile of the City of London. A decade ago it consisted of over 170 individual dealing rooms, and employed thousands of people. The culture was one of eye contact, face to face interaction, sweat, telephones, and paper. The majority of dealers probably decried technology, and could not envisage the death of their paper-based system. Well, the big bang of October 1986 changed all that forever. The liberalisation of the market combined with global telecommunications, and computer based trading left the trading floors looking like the Marie Celeste. Screen trading was a revolution that changed the nature of money markets, and world trade. The first lesson of the big bang was predicted by many with just a modest appreciation of system dynamics. Those responsible for the computer-based trading systems had overlooked the simple mechanisms of delay and synchronisation: any distributed system, with similar communicating processes, rapidly moves into limit cycles as delay is diminished. In non technical terms: trading systems go into a chaotic buy, sell, buy pattern. Since 1986, when PhDs were very rare in the City, dealing systems have now become rocket science. Lets examine the significance of this. In any war or conflict, and that really is what the city is all about, accurate information, control, and the deployment of adequate resources are necessary to win, and telecommunications is the primary enabler. During the past 20 years telecommunications has changed to a dynamic, and rapidly evolving, economic force. This has been engendered by two principal technologies - micro electronics and optical fibre. Today the UK has 3.5 million kilometres of optical fibre transporting over 90% of all domestic telephone calls and 70% internationally. A signal launched into an optical fibre in London arrives in New York just 0.03 seconds later - less than the cognition time of the human brain - i.e. faster than we can think. The assembly sorting, ordering, and presentation of electronic information, and making decisions based on it, can now be performed more efficiently by computers than by humans. Most sectors of human activity are now undergoing a process of meltdown, and the City is no exception. Technology, and the need to ve competitive are forcing change. In short, whoever has the best communications, computers, and decision algorithms has the edge necessary to win. But in this regime a win may only be a fraction of 1%. Computer hardware processing and storage capability double every 12 to 18 months. Sadly, the current software expansion tends to undermine these increases. It seems that the software producers are competing to build the worlds heaviest aeroplane. Every year more functionality, that you dont actually need, is added and slows down the process. This may be impacting the City now, but ultimately will have no effect as software that optimises itself (by directed mutation in a biological sense) will ultimately take over. In many sectors it is fashionable to boast an ignorance of technology, and all things scientific; however, in the most effective money markets, this is no longer the case. At the forefront of systems design are people putting together computers that will overthrow mankind as the marshaller of information, and decision maker. In a lecture 20 years ago I had the temerity to suggest that one day computers would play chess better than humans. This was greeted by howls of derision. Well now computers do play chess better than us, and soon they will be trading on the market better than us. Despite all their apparent sophistication, the majority of traders adopt a decision process that is simple, and amazingly successful. Shares which go up, continue to go up until they turn down, and then they continue to go down until they turn back up again. Couple this with a broad knowledge, and intuition, and youve got a world-class trader. Computers with algorithms based on this simple approach are relatively successful, and make money but need more intelligence. Todays market leaders are using programs with artificial intelligence to buy and sell across whole markets. What is artificial intelligence? In principle its computer algorithms that learn from experience. The algorithms predict what should happen then analyse the results, and change themselves 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. In todays market there is no money or gold just numbers in databases. The market used to be controlled by paper, now its controlled on screen by humans who represent the ultimate delay and risk. So the City now has rocket scientists producing artificial intelligence systems that are outperforming many established traders sitting at their screens. Soon we may see these traders being replaced by computers guided by a very few people. So far, machines dont commit crimes, rarely make mistakes, are non-emotional, and truly objective. They can work all day 365 days a year, and are totally dedicated. So what might be the next step for the already metaphoric City? Well, just as the traditional trading floors have become museums, we may see the screen-based trading rooms suffer the same fate. If we are working from screens, why do we all have to be in one room - and why do we have to be a part of the same company? We dont - its unnecessary, and restrictive. As in many other sectors, working from home or telecottaging is an obvious next step, and signals the fragmentation of the industry. I am capable - perhaps I should become active as a trader in my spare time! 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 all be information space - without physical location - the infinite city. What are the constraints to this meltdown of the world trading system? There is much talk of the Information Superhighway, and national information infrastructures as if they are here today, but they are not. What we actually have is the Information SuperFootpath. A set of narrow-band links providing a tiny fraction of the communication power demanded by modern computers. Our ability to work from anywhere is constrained by the 14.4kbit/s modem. This limitation is further compounded by over 26 different electronic mail and data interchange systems creating some interesting bottlenecks. However, information technology moves remarkably fast, and it may only be a few years before the industry agrees suitable standards, and produces the Global Information Superhighway. The fragmentation of all sectors will ultimately realise an information overload. Humans will no longer be able to cope with the amount of data, and decision speed needed to trade on a global market many times more diverse than todays. However, we will be able to lend a guiding hand, and ensure that companies and institutions see their resources marshalled in a desirable manner. So far, machines have not developed an ability to design and perfect strategies, nor consider the ethics or morality of their actions - these are still in the human domain. The move from the trading floor to the electronic dealing room has seen 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. As in the case of almost every other business sector, the City will be dominated by a new generation of barons. Unlike their medieval forebears, their power will not be based on land and armies, but on information, knowledge, and skill with IT. Like medieval barons they will probably live in castles dispersed across the planet, and defended by all-seeing, and nearly all powerful machines. The world has a lot of rocket scientists with a lot of ability - and access to information! 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 may perceive as random is often chaotic, and chaotic events have patterns which were good at spotting. This is the basis of human trading systems. The machines advantages are their ability to take a wider perspective, recognise more patterns faster to predict the next move, and continuously examine the outcomes of all previous moves. In short - they are (or will soon be) smarter than us! So, will humans have a place in the ultimate system? Probably not! Perhaps then, a new revolution will see the demise of moribund concepts such as money - but then again - perhaps not! |