Faster computers and speculative capital

Today's (4/14/06) Wall Street Journal reports more evidence of the connection between speculative capital and electronics. An article titled "Supercomputers Speed Up Game" by Edward Taylor, Aaron Lucchetti and Alistair Macdonald reports on how faster computers are contributing the swelling of automated stock trades and consolidation among the world's stock exchanges.

The use of computers in trading of course is nothing new. In fact, modern speculative capital (post-Bretton Woods, started with the advent of money markets) only exists because of networked computers. But the march of technology -- faster, smaller, cheaper -- continually changes the game. The trend allows smaller players into the game:

Buyers and sellers have been matching up electronically since the 1980s. But an increase in computer capacity readily available to even small hedge funds -- investment pools for institutional investors and wealthy individuals -- has changed the game. "With four people and 50 computers that have the power roughly equivalent to a Cray supercomputer, we can achieve what someone else would need one trader and 100 analysts to accomplish," says Jonathan Kinlay, chief executive of Proteom Capital Management Ltd., a Bermuda-based hedge fund with about $100 million under management.

Nasser Saber, in his excellent and unique book Speculative Capital described how speculative capital tends to more and faster trades to take advantage of increasingly smaller price differences in different markets or (what amounts to the same thing) different derivative configurations, the practice called arbitrage. Proteom, mentioned above, exploits differences in the S&P 500 Index and the individual stocks that make up the index (if I am reading the article correctly):

Proteom uses computers to execute complex trading strategies based mainly on stocks in the Standard & Poor's 500-stock index and their tendency to rise or fall sharply and quickly, a measure known as volatility.

Testifying as the importance in electronics in this practice:

"This business could not have existed 10 years ago [because] the computational power was not available," Mr. Kinlay adds. "The execution of a trade, the analysis of the live data, the updating of databases and the construction of portfolios of stocks are all automated."

The technology has also reduced trading transaction costs, make more trades financially feasible. The article cites the growth in transaction volume at many exchanges, as well as the growth in the share prices of the exchanges themselves.

Of course, one good turn deserves another, driving the process forward: "'There is an arms race [among exchanges] to be the fastest,' says Steve Swanson, president of brokerage firm Automated Trading Desk LLC."

Here's a link to a paper I did on speculative capital.

jd