Peter Levin’s Rethinking Markets

October 29, 2007

The problem with Hulu…

Filed under: Uncategorized — Peter @ 10:47 am

…has nothing to do with their fight with iTunes. It’s that there’s virtually nothing they’re showing that I want to see. Their shows suck.

Why exchanges shift from open outcry to electronic trading

Filed under: Prices, Technology — Peter @ 8:32 am

An article in the NYT on the shift away from open outcry today, which gets it right and gets it wrong. The right part is that the shift and merger of the CME and CBOT onto a single floor located at the CBOT spells the end for open outcry. It’s a natural transition point, and the break will break what’s left of pit trading. There will likely continue to be a floor for the largest volume contracts, but even those won’t likely survive for long. I’ve long been agnostic over whether or not the floors will die (historically, there were dire warnings about the death of open outcry about every 20 years since the 1950s). But this may well be it.

What I think the article gets wrong is the why. The imagery is one of the futility of human labor against the labor of a machine. As one trader notes, “Sometimes it feels like we’re John Henry going up against the steam hammer.” Kate Zaloom is quoted as noting that in electronic trading is “the idea of having a more pure market, one that doesn’t have the complications of flesh and blood.”

This idea, that technology displaces humans, is way too undifferentiated to be a useful explanation. Stuart Elliot’s research for the National Research Council, in part estimating the occupational displacements due to technology by 2030 (I include the key table at the end, just to demonstrate how scary-screwed many workers might be), show pretty wide heterogeneity across occupations. So one question unanswered by the John Henry argument is, why trading? Lawyers don’t seem to be going anyplace, and I’m not convinced that the technical requirements of work are great explanations.

The second problem is this idea of a ‘more pure market.’ It’s kind of BS. I did a literature review on what financial economists themselves suggested were the differences/comparisons/reviews of open outcry and electronic trading, and the results are decidedly mixed.

In the table, the research is placed on the side that is ‘better’ in the estimation of the author, using the measures they use - liquidity, transaction costs, obtaining adverse (that is, private) information. So a study on the open outcry side suggests that it’s better than electronic trading. My favorite finding is that when comparing the actual prices with the theoretical prices you should get if markets were perfectly efficient (or, more precisely, if markets followed the formulae exactly), both open outcry and electronic trading kind of suck.

So the question remains, why did electronic trading displace open outcry? I think the answer is pretty simple:
1) The clients changed. The modal trader in the 1970s was a high-income individual who was looking to increase returns to his (yes, his) investments via a riskier kind of financial investing. Commission costs, transactions costs, these are important, but the form of trading mattered little. At the end of the 1990s, it was estimated that something like 97% of the trading in financial futures came from institutions. Electronic trading is great for these clients. They bought their own seats, demanded a voice in decision-making. Their interests are different from both floor traders and from wealthy individual clients. It cannot be stressed enough that electronic trading is best for institutions who are able to capitalize on the kinds of things that electronic markets are good at - speed, cross exchange trades, digitized, already-model-manipulable data.

2) Electronic trading changed the products of the CME and CBOT. The exchanges’ products are contracts, liquidity, and prices. Electronic trading changed what counts as a price, so that while the two products look the same, they are not the same. The information that is captured in an electronic price is qualitatively different from the information that is captured in an open outcry price. They overlap, but they are distinct constellations of information. Here I agree most with Daniel Beunza and Yuval Millo, that electronic trading is losing information that might be useful in the change-over. But if that information is not useful to someone who could actually, you know, use it, it doesn’t really matter. In any case, the idea that electronic markets win out because they’re more ‘pure’ is just not correct.

I think there’s something sad about the passing of open outcry. I’ll miss the guy from the meats who sold beef jerky out of a duffel bag. And the quick wit and black humor. I also am not terribly sad. The guy who got women to give him blowjobs behind the desk, the references to Lind-Waldock as Lind-Welfare because they actually hired Black people, the eye-candy summer interns, all that is part of the open outcry world too.

[Source: Stuart W. Elliott, "Projecting the Impact of Computers on Work in 2030," p. 37, available online [PDF].] (thanks, Alex)

October 26, 2007

Markets and visualization

Filed under: Technology — Peter @ 5:37 pm

Daniel’s discussion of visualization is interesting, and it’s something I’ve had on my mind since reading Tad Williams’ Otherland series (the mysterious Mr. Sellars has a virtual garden that provides the GUI in an astoundingly complex virtual environment).

I think Daniel conflates two separate issues. The context is that market visualizations continue to be conservative, with the ubiquitous stock chart and even the ticker continuing to be the standards. This despite innovations all over the place in other kinds of visualizations.

The two issues, I think, are 1) what data should be contained in a market visualization; and 2) how might these visualizations be implemented into existing market trading praxis. The first is a question of information, and the second is a question of innovation, related but distinct.

So first, imagine two different visualizations, one a traditional chart that includes a set of quality measures that don’t traditionally make into market information (say, the number of times a firm’s CEO had family relations that week) and the other a new way of visualizing the same information everyone else uses. A good example of this second type is Bashiba (here’s a completely fascinating .wmv video link). Bashiba takes volume, volatility, prices, and maps them to the size of waves, the music, the weather. A listen and glance can tell you all the information at once.

What I think would be a disaster is to try to incorporate both at once. That kind of wholesale innovation is nice to think about, but wholesale revolution occurs less often than one might think, even (or especially) in finance.

So, the second part seems quite a bit like an institutional innovation problem to me. Normally, per someone like Clemens, the argument would go something like saying that innovation works if it is introduced within the currently agreed-upon form. So might seem like something new, but it is recognizable as something familiar. Particularly in the trading world, where for all the hoopla over the new masters of quant, many traders prefer three columns of numbers for buy-side, sell-side, and current trade, the recognizability has to be pretty immediate, and pretty accurate. A colleague, Brad Paley, makes his living making it possible for traders to learn the screen by “grabbing it with their eyes,” as one person describes it. He makes a good case for innovating by reproducing the familiar in new medium - not by copying a notebook electronically per se, but by making his handhelds enough notebook-ish that they are easily understood.

I’m not sure why Daniel believes that a ‘low-end entrant’ to the industry would lead the way in innovation - other than suggesting that innovations come from the outside, I’m not sure what the basis might be for that. I would think that innovation will come when traders recognize that the ‘new data environment’ actually gives them better means to act decisively than their old means. This suggests a generational shift in traders more than a low-end industry outsider.

art, bodies, remains, morality, value

Filed under: Art — Peter @ 3:54 pm

There is so much to find interesting in this article on a debate in France over whether or not to return a mummified, tattooed, Maori head. The argument is whether the head should be considered ‘human remains’ and returned as “an act of ‘atonement’ for colonial-era trafficking in human remains,” or an artifact that qualifies as a piece of art. If it is art, it falls under the jurisdiction of a 2002 law stating that works of art are “inalienable.” It is kind of a big deal, in that if the head is considered a body part, all sorts of heads, bones, and mummies would be sent from museums back to their countries of origin, where they would presumably be re-buried. The American Museum of Natural History in NYC apparently has 30 heads.

So what’s interesting here?

First, it is a mummified, tattooed, Maori head.

Second, there is a distinction between the law on the one hand, which calls for a categorical either/or distinction between art/artifact and human remains; and the reality on the other hand, that the head is obviously both a cultural artifact and a desecrated body part and symbol of European colonialism. This will be resolved not by changing the object itself, but through a political argument and resolution over what the head ‘is’. Of course, the head will still be both artifact and body part. But the administrative powers-that-be will make it into one or the other.

Third, another museum in France, the Quai Branly, argues that: a) the heads should definitely stay in France, since they are important cultural artifacts and sending them back to have them buried (and hence destroyed) is “a way of erasing a full page of history”; b) the four heads in the Quai Branly’s collection are “stored in a very special area, and absolutely will not be put on public display,” with access available only for a few experts; and c) they don’t know the heads’ value.

Hidden someplace in this example is something that’s been on my mind with regard to the new-new fashion of hedge funds buying up contemporary art. Art really is a funny kind of commodity, and it really does dance on the boundaries between culture and market. These kinds of controversies are surprisingly common in the Art World, and not just with antiquities and cultural artifacts - British authorities declined also to prosecute Elton John for owning and displaying “Clara and Edda Belly Dancing,” a photograph of two girls dancing around, one of whom is naked. So only buy the “safe” art? That doesn’t seem like a good solution either, since it doesn’t maximize on economic value..

October 12, 2007

Radiohead as Rorschach test

Filed under: Prices — Peter @ 11:08 am

It seems that Radiohead’s experiment into paying what you what for a digital download of their new album Rainbows. For anti-DRM activists, it’s the end of music labels. For skeptics, it’s just a demo teaser marketing scam designed to get you to buy their ‘real’ CD for more money. For market-is-everything economists, it’s an exercise in applying world-is-nail to I-have-hammer.

Of course, they’re all wrong. It’s clearly a dog chasing a squirrel. Or something.

(incidentally, the page on the edit wars over whether or not to show the inkblots themselves is a brain-squeezer.)