Technical Discussions

Thoughts on Engineering & Technology

Saving Global Markets

Everyone involved in tackling the Global Free market meltdown has been tackling different aspects of the problem. The focus is on getting the global economy back on rails, putting growth back onto the charts and preserving savings, jobs and the macro-economic infrastructure of the world as we know it today.

In my opinion, all this started in 1987 with the first increase in volumes of trading that could no longer be sustained by legacy systems. This led to the initiation of large scale electronic automation. Following NYSE would show you that the exchange almost runs itself. Here’s an open-book on the history of this automation. Almost all other exchanges were modeled after this as free float indices.

New Technology has made it possible to deal with the huge volume of trading. The current consensus is to impose more stringent regulations on free market trading. Regulations by themselves will have to be subtle and provide guidance rather than impose rules to avoid contradicting the fundamental principles of the free market.

Technology empowers volume trading at speeds no one can react to (e.g. Friday, 24-Oct-2008, Dow Jones opened and lost 400 pts within the first 5 minutes of trading.) I have witnessed numbed retail investors pulling out when the markets were sliding for no rhyme or reason thinking that they would ensue some liquidity for themselves that could be invested in Savings Bank accounts. Investors are psychologically said to follow a herd mentality [citation needed]. When some start selling, a domino effect ensues ending in a worsened market slide. Investors from either institutional, corporate or retail sector react similarly however educated they might be in financial investments.

My proposed solution to dealing with the global market slump might sound naive, but is quite plausible. With the present crisis in hand we can slow down volumes of trading using the “Automated Systems.” I propose a system of limited transaction credits and limited volume credits for trading for all types of investors. An investor involved in high volume buy-ins or sell-outs can be restricted. The same can be done for high transactions (for those who have multiple holdings.) This can be imposed globally. The end of the European-Asian summit showcases the willingness of governments across the globe to tackle this “together”, in their own words, “with teamwork.”

The main idea is to slow down the system. As humans we are adept at solving problems once they slow down to a rate of change that can be delt with. Human biological response to rapid change or speed has limitations. Road Safety norms also propose speed limits to help us react better to situations. Like “Formula 1 Racing“, high speed reaction requires entirely different technology, training, psychological preparedness to react ahead of events (even turns) and huge risk mitigation (car safety in Formula 1 today is at an all time high.) This is certainly not the case with investors of all portfolios.

In 1929 when the economic crisis ensued, we had fewer free markets and the hit was considerably bad. However, today the markets are distributed across the globe. Such a system is also prepared to share risk and reward rather than cascade effects of a single source of investors.

If we slow down the pace of trading, we would be able to choose the right regulations in the interim to stabilize economy. We know that there is a global economic slow-down, either that takes control of our decisions or we take over the slow-down.

The first thing human beings lack when tackling a looming crisis is patience. That is the first part that we need to face this crisis. Regulation of free markets to slow them down might force introspective solutions to strengthen the markets. The second think we do is to search for a scapegoat in retrospect. I am convinced that the NATO war against Iraq (mostly supported by the U.S.A. and U.K.) will be on top of the lists. There will be many such on the list. Retrospect will reel our focus away from the future forcing us to make more mistakes going forward. This is the first thing we need to avoid.

My solution, Take the very technology that allowed high volume, high speed trading and use it to slow the system down. This is the very first step to avoid a high-speed 1929 styled crisis. The worst part is, if we don’t use the technology that helped the slide, we will find ourselves moving into disguised socialist reforms in all countries. This might prove contradictory to the global free market economy that has been built over decades. Capitalism is not bad, free markets are not bad, gaming in markets is not bad; it is as close to a natural process without an illusion of control.

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October 25, 2008 - Posted by | Artificial Intelligence, Business, psychology, Software | , , ,

2 Comments »

  1. Nice article but here is a article that seems to blame the US fed for causing the economic crisis.

    http://www.babeled.com/2008/09/27/us-economy-in-crisis-explained-part-1-of-3-how-it-began/

    Comment by turinghut8 | October 27, 2008 | Reply

  2. My article only focuses on a solution going forward. You could blame the Fed Subprime Mortgage Crisis or Speculative Price Inflation of Crude Oil or Extremely Low Priced Products from China without a floating currency or just about anything else.

    What I have understood is the world economy has insofar been strong enough to withstand issues like Natural Disasters (check the 2004 and 2005 calendar for them.) These years the sentiments of the people were not hit and the markets still went high.

    The War in Iraq did cost the Feds a lot of money in Defense Sped the liquidity crunch as it did not reach a quick conclusion in terms of the intended goals.

    To state that the Subprime Mortgage Crisis cannot be dealt with using countermeasures is bullshit. This is speculative shrinking of perceived wealth in a free market. You can blame anyone. In fact, half the world will be starting a blame game.

    However, the solution is to address the credit crisis. To do this one has to buy time and that is exactly what I propose, buying time without shutting down trading. Each trader gets credit points for buying, loses them for selling; loses credit points for any transaction. The credit points that can be spent per day or even per hour can be restricted to avoid high speed meltdown. This lets the investors also think through their strategy and avoid the bailout. The index management can also reach heavy sellers and work with them to avoid further crisis. Looking forward is possible and we can avert further crisis.

    Comment by gandalfgreyhelm | October 27, 2008 | Reply


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