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Tuesday, October 26, 2010

Technology, the ultimate destructor of inefficiency

This post is a continuation the series of topics I am covering, which will culminate in my view of where the US dollar is going and why. Previous posts include Value of Government and it's Currency, Human nature is to react rather than prevent, Answering problems with what you know, and Is the US government owned by banks.

First, let me state I have been a computer programmer since the age of 13. Needless to say, my view of technology and it's effect on society is a bit skewed than the average person. I of course, think I have more insight than the average person, you be the judge after reading this article.

Computerization of business processes has been a core driver of technological advancement. The very first computer was ENIAC. The purpose was to in effect, be a giant calculator for military purposes. Before the ENIAC, what was done for massive mathematical computations was to divide 1,000s of calculations among a 100's of people to compute. Those calculations where then fed back into the "people calculation machine" for the next set of equations. This was repeated until the objective values where reached. Then, a scientist, mathematician, etc, would review the results, derive some meaning, then repeat the whole process for his next calculation required to solve whatever problem was being worked on.

The ENIAC was used to streamline the massive math computations required around developing the first Atomic Bomb. It is very fitting that computers was born out of such a need.

In effect what did the ENIAC do? It replaced an army of people doing a repeatable task with a "computer". It in effect, improved efficiency by speeding up problem solving time and reducing cost. Ever since then there has been an unstoppable force invading every crevice of society by improving turn around and reducing cost.

We have seen telephone companies such as AT&T come toppling down as telecom is computerized, becoming a commodity. Companies like Google the dwarf advertising industry like no other company in history. Companies like WalMart, that through computerization, has created an automated distribution system starting in china, and rippling through out the world. Creating a delivery system requiring extremely low inventory requirements for the retailer.
I could go on and on, lets now get to Financials.

We have seen arbitrage been reduced from days and hours down to sub-second trading. We have seen the stock market go from zero percent traded by computers to over seventy percent of all trading is done using automated computer systems with no human real time direction. We have seen the US stock market lose value in seconds, with many trading in the pennies this year, int he "flash crash" blamed on computer trading.

We know now that Goldman Sachs has a vast network of super computers with high speed data connects allowing it to do massive trades at sub-second levels. When this was developed it was not widely known, and only came to light in the last year, and was dubbed High Frequency Trading.

The financial system trades with such agility, such automation, at such a ridiculous speed. The equities of the companies that are being traded do NOT reveal their financials on sub-second level on a second by second update. The information distributed to the public is generally once a quarter. The creation of money is announced through the Federal Reserve Bank, and is executed on a somewhat planned interval. The US government announces it's budget once a year, with some ad-hoc revisions.

The general point is the trading system is vastly faster, more agile, and more automated than the companies and countries that it represents. The trading arena has been twisted into a computer game, with it's own rules. We have seen computerized trading wipe out vast amounts of waste and arbitrage in the last 20 years. Every microsecond now is traded against, where just 20 years ago you would phone in your order to the NY Stock exchange for someone on the floor to use a hand signal to trade the stock.

The disparity of the trading platform, and the slow data dissemination to the public about the companies and countries cannot last. Computerization will expose this inequity through a crisis. Further, any action done by a person, such as Ben Bernanke of the Federal Reserve, will be acted upon with greater speed, greater volume, and greater volatility as time goes by.

In effect, it is my opinion, that we are seeing the older guard, the analog structures in the financial markets pitted against super computers. And I believe the computers will win this battle. Having a group of people meet once a month to decide the interest rates, volume of money to be printed, and change laws to "fudge" their outcome will not stand against the technology they face.

They are not changing their approach, and until their processes are computerized , they are fighting a battle that they will lose. For they are inefficient, and will be replaced, just as the ENIAC did with the 100's of human computers.

Lets just hope the financial computers are not building a financial atomic bomb.

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