Hasta La Creative!

The “algos-gone-wild” culture of global finance.

From Adbusters #105: The Big Ideas of 2013

ETHAN COX

One of the stumbling blocks the World Economic Forum faces is its garish elitism. Oxfam announced that the world’s 100 wealthiest individuals earned enough money in 2012 to end poverty around the world four times over. Meanwhile, this same global elite is gathered at Davos for the annual meeting of the World Economic Forum (WEF). International hot shots arrive here on private jets to attend somber seminars on the fiscal cliff, climate change, and food security whilst nibbling away on decadent cheese and sipping expensive wine.

Although the lavish spending required to put on and attend the forum is hypocritical considering poverty, inequality and the economic crisis are the chief issues on the table, perhaps the real problem is not with “elitism” as such. The real issue is what Jem Bendell calls the “sycophancy of the elite.” This rampant sycophancy “restricts [their] ability to explore root causes [of the financial crisis] for that might challenge [WEF] members.”

Professor of Sustainability Leadership and Founding Director of the Institute for Leadership and Sustainability, Jem Bendell explains for Al Jazeera:

In 2008, as the financial crisis was in its first flush, the founder of the WEF, Klaus Schwab, effectively apologised for the Forum not having provided insight on the coming storm. “We let it get out of control, and attention was taken away from the speed and complexity of how the world’s challenges built up,” said Professor Schwab. I wondered at the time whether an institution that pays its bills by convening the world’s largest companies to entertain them at high-powered meetings would be beset by a form of systemic sycophancy, restricting its ability to explore any root causes that might challenge members. Five years into the crisis, with more scandals in the past year than ever, from libor to money laundering, we don’t see a major shift in approach at Davos. Banks participate in many of the Global Agenda Councils, and this year UBS co-chairs the Davos summit.

The question therefore formulating in my mind as I head to Davos this year is whether sufficient people in powerful institutions really understand how broken the current systems are, and if they are brave enough to look honestly at what it may take to change them.

For an honest look at the root causes of the Flash Crash, read more below from Darren Fleet, as featured in Adbusters Big Ideas of 2013:

. . .

A sum begets an action, which begets a reaction, which begets a sum, which begets an action, which begets a sum, which begets a reaction, which begets a sum. Before you know it, in less time than it takes to blink an eye, a billion equations have flashed across your stock floor computer screen.

You blink your eye again and the global economy, its products and the livelihoods of millions of people are in free-fall. Pension funds, retirement savings, college trusts, union investments, commodity gains, all wiped away by an out-of-control computer equation. The spark? A lone wolf billionaire or hedge fund manager dumping millions of units into a trading algorithm. Or maybe a faceless entity looking for quick kills in the shadow economy of Dark Pools and High Frequency Trading (HFT) – assets held for only millionths of a second before they’re traded again.

Ever since the Flash Crash of 2010, when an out-of-control financial algorithm cost the Dow nine percent of its worth in the span of a few hours, regulators across the world have been debating if, and how, they can rein HFT in. This has proven to be a difficult task. While this type of hyper-trading can go rogue beyond human control, it is also incredibly popular, accounting for an estimated 65 percent of all market transactions.

In the highly networked financial world, mathematical functions trigger exponential waves of buying and selling on a daily basis. This relinquishing of control to programs has ushered in an entire new realm of speculation, adding even greater layers of chaos to an already temperamental system. The appearance of ghost algorithms, “algos,” like the one that snaked through the US stock market in October 2012, making up 4 percent of all trades in one day, have left even experienced traders perplexed. They can’t tell if the algo is human-controlled, automatic, or one of a plethora of equations like “news-algos” that surf the web and translate headlines into stock probability within nanoseconds.

In Europe and Canada, small proposals have been made to combat the unpredictable dark side of HFT, like slowing the necessary time of asset ownership from a millionth of a second to five hundredths of a second, or placing small levies on mass trading of financial units. Some have even proposed a “kill switch,” a big red Off button that can be pushed when doomsday algorithms run wild, buying, selling and erasing mass quantities of human wealth and labor. What these kinds of suggestions have in common is that they do nothing to address the problem.

When the fundamental premise of trading is profit at any cost, when the rules are set up in such a way that the trader with the biggest super computer wins, it goes without saying that some aspect of basic human morality has been lost. Within the context of global financial anarchy, regulations in territories like Canada and the EU will only serve to drive HFT into greater concentration in unregulated markets in the US and Australia, and deeper into Dark Pools which, according to recent estimates, account for nearly 15 percent of global GDP – money with no identity buying and selling assets with no name. Real change will come when the basic premise of HFT is combatted head-on.

What the world needs isn’t another speed limit measured in abstracted nanoseconds. It needs speeds measured in human time, hours and days. A 24-hour stock ownershop rule, the only sure thing able to stop the algos-gone-wild culture, is a good place to start, followed by a Robin Hood tax on all speculative financial transactions.

What holds these reforms back is not the cost, not the understanding, not the sense of it, but a global culture of sheepishness. A basic lack of confidence. A culture that thinks it’s too stupid to understand the market. A culture that sees economists as scientists beyond reproof rather than as salesmen responsible for the products they sell. We need to turn off and tune out the paid-for financial pundits who say there is only one way to be. We need to uproot the internalized neoliberal, real estate agent and growth economist thinking embedded in the subconscious of our democracies.

In 2011 the global imagination erupted in a frenzy of possibility. Has it been so quickly sung back to sleep?

Now put this poster up