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I for one welcome our new algorithmic overlords

In recent weeks, “markets” (more specifically, bond markets, but that’s less important for this particular argument) have been directly responsible for the change in leadership in two countries (Greece and Italy) and at least indirectly responsible for the change in another (Spain — in the form of all sorts of perceived pressure on the electorate).

At the root of the crisis in Europe is something that no doubt is real — excessive public debt, in some cases, like Greece, plainly unsustainable, while in others (e.g. Italy) the debt was sustainable at reasonable interest rates.

In this game, if everyone stays confident that you’ll be able to pay, and interest rates stay low, then you’ll likely be able to pay. Any loss of confidence can lead to a spiral and end up in default. Again, there’s real problems underlying this, and by now the fact that some countries have already subscribed debt at very high interest rates means the perception has (partially) become reality: short of significant structural changes, they won’t be able to pay the money back. Once doubts reach the people on the street and they start withdrawing their money from bank accounts, well… game over.

But I digress. My point was that a lot of this was driven by “the market(s)”. What exactly is(are) this elusive creature(s)? Is it beast or fowl? Is it a mythical monster? Snooki-like perhaps?

No — it’s just a faceless amalgam of people of course, but something else: software.

Algorithmic trading platforms, whether human-filtered or not. Automatic buy/sell triggers based on complex conditions that can execute in real-time, or near real-time. And so on.

These systems are not in direct control of the entire money supply, but they are in control of a fairly sizable chunk of it. (By direct control I mean that a software system can, without human intervention, execute a transaction, such as buying x shares of a given stock). This, in a system in which few people understand each individual component, and no one has a view, much less an understanding, of what the system entails as a whole.

This is not some sort of “conspiracy”, it’s local optima at the expense of global balance: for each individual, hedge fund, investment banks, etc., it’s perfectly reasonable to set up these various automatic systems and cutoff points, but when you put all of this together you have both a) a lot of really jumpy and sensitive buffalo in your herd and b) are surrounded by cliffs to run into.

The system both generates tiny signals of “movement” (up or down, it doesn’t really matter) and is ultra-sensitive to those same signals.

And in the case of governments and the bond markets, well, even tiny variations are important, because they have significant ripple effects in the long term.

This, naturally, also applies to the spiral up (followed by the spiral down) of the 2006-2008 bubble/crash.

So while software embedded in weapon systems has been our obsession as a culture (the “Terminator scenario”) where it’s really been causing problems for a while (even contributing to toppling governments!) has been in finance/economics.

So I think one could make a fairly convincing case that what we have here is a sort of mix between Skynet and the Ants from Deep Space Homer (where, incidentally, the meme “I for one welcome our X overlords” started).

Another thought: this could be considered as an indication that the Singularity has already happened in some form, where a meta-entity that we can’t see or control is now operating and unknowingly causing impact back on our level. By ‘unknowingly’ I mean that I don’t think meta-entity (Singularity or not) implies meta-consciousness, whether reflecting on itself or on the elements that are part of it, in this case, us+Earth. Or it could be that it is aware to some degree or fully, but perhaps it finds it impossible to control itself, or needs to do it to survive (imagine the destructive effect of many of our physical actions on our own particles — say, breathing, or eating).


Now, perhaps appropriately, I’m off to re-read Accelerando. Those lobsters crack me up every time.

2 responses to “I for one welcome our new algorithmic overlords

  1. Michael Rowehl December 6, 2011 at 7:11 pm

    Another area where trading in abstracted entities has allowed local maxima to undo the greater good is in IP/patent protection, also covered heavily in Accelerando. Coincidence? I don’t think so.

    “Halting State” is another one that’s worth a re-read. Bank theft in an MMORPG. It was good the first time around, but it took a re-reading for me before it really sank in. Think about current micro-work platforms like Gigwalk and Taskrabbit hooked up to an in-game AI that figures out manipulating the real world is the best way to win the online game. Mmmmm… that’s some tasty singularity right there.

  2. Ben Plowman December 6, 2011 at 8:09 pm

    Interesting stuff.

    Worth noting is that what little research has been done into algorithmic trading (AT) appears to suggest that it increases market liquidity. IANAE, but this means that trades are much less likely to impact the price of a stock than they were before AT. This means that while AT may indeed be a crude form of the singularity, it does not appear to be reducing global economic stability. Here is the source: http://marginalrevolution.com/marginalrevolution/2011/10/does-algorithmic-trading-improve-liquidity.html

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