Category: markets

The Real-Time Web and Information Arbitrage

Published July 25, 2009 by cgerrish

hermes

As the ‘RSS-is-fast-enough-for-us’ crowd begins to resemble the Slowskys from the television commercial, an effort has begun in earnest to speed up the transport of RSS/Atom feeds in the face of real-time media. These efforts will answer the question about whether RSS is structurally capable of becoming a real-time media. If the answer is yes, then RSS will become functionally the same as Twitter. If the answer is no, then it will become the rallying point for the ‘slow-is-better’ movement.

There’s a strong contingent who will say that more speed is just a part of the sickness of our contemporary life. We need to ‘stop and smell the roses’ rather than ‘wake up and smell the coffee.’ And while there are many instances in which slow is a virtue, information transport isn’t one of them. Under electronic information conditions, getting your information ‘a day late’ is probably why you’re ‘a dollar short.’

When you begin thinking about the value resident in information, it’s instructive to look at the models of information discovery and use on Wall Street. Analysts generate information about companies in various investment sectors through quantitative and qualitative investigation. The high-value substance of the reports is harvested and acted upon before the information is released. High value information lowers transaction risk. Each stage of the release pattern traces the dissemination of the information. Within each of these waves of release, there’s an information arbitrage opportunity formed by the asymmetry of the dispersion. By the time the report reaches the individual investor—the man on the street, it is information stripped of opportunity and filled with risk.

In Friday’s NY Times, Charles DuHigg writes about the relatively new practice of high-frequency trading. Under electronic information conditions, the technology of trading moves to match the speed of the market.

In high-frequency trading, computers buy and sell stocks at lightning speeds. Some marketplaces, like Nasdaq, often offer such traders a peek at orders for 30 milliseconds—0.03 seconds—before they are shown to everyone else. This allows traders to profit by very quickly trading shares they know will soon be in high demand. Each trade earns pennies, sometimes millions of times a day.

If you were wondering how Goldman Sachs reported record earnings when the economy is still in recession, look no further than high-frequency trading. The algorithmic traders at Goldman have learned how to harvest the value of trading opportunities before anyone else even knows there’s an opportunity available. By understanding the direction a stock is likely to move 30 milliseconds before the rest of the market, an arbitrage opportunity is presented. High-frequency traders generated about $21 billion is profits last year.

Whether you think the real-time web is important depends on where you choose to be in the release pattern of information. If you don’t mind getting the message once it’s been stripped of its high-value opportunity, then there are a raft of existing technologies that are suitable for that purpose. But as we see with the Goldman example, under electronic information conditions, if you can successfully weight and surface the opportunities contained in real-time information, you can be in and out of a transaction while the downstream players are unaware that the game has already been played.

Creating an infrastructure that enables speed is only one aspect of the equation. The tools to surface and weight opportunities within that context is where the upstream players have focused their attention. And while you may choose not to play the real-time game, the game will be played nonetheless.

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The Bit Salesman’s Lament

Published May 31, 2009 by cgerrish

salesman

He’d lugged his case back and forth, up and down that long dusty road. It’d become a lot lighter once some of the atoms were exchanged for bits. But for a long time various sequences of atoms were still used to encase the bits. Every few years, they’d come out with new model of the arrangement of atoms. Some better way to get at the bits and play them with greater fidelity. To a guy lugging a case around, that meant everytime a new model came out, the case got lighter.

It had pretty much been a transport and titling business. Bits encased in atoms moved from “here” to “there,” the title of ownership was transferred from the seller to the buyer for a monetary recompense.

When the real estate prices in the cloud got cheap enough, the bit warehouses were moved there. The old atom-based bit cases were dispensed with altogether. That’s when the business really changed. There were no more separate bit containers to lug around. The bits just flowed directly into the players and were stored there. There was still a “here” and a “there,” and the title still transferred– so the fundamentals remained the same.

These new cloud warehouses were able to store a lot more inventory– certainly much more than could be stored on a customer’s bit player. For a while, there was a pretty good business in selling players with larger and larger bit storage containers. But the same low prices that motivated the bit sellers to move their warehouses to the cloud began to attract their customers as well. Customers started renting container storage units in the cloud and storing excess bits there. In response to this the bit players stopped growing larger bit storage containers and started playing bits directly from the storage warehouse.

This was another change in direction for the bit business. The idea of “here” and “there” was disappearing from the equation. Even the idea of moving bits from the seller’s warehouse to the buyer’s warehouse didn’t quite make sense. To the customer’s bit player, all these warehouses were the same. The bit salesman’s business was now just keeping track of who had bought access to which bits in the warehouse. Shoe leather virtualized into a voice over the wire.

Of course some customers still wanted local delivery of bits. Usually they were interested in chopping up the bits, recombining them with other bits to make new sequences. These new bit sequences were then shipped off to the warehouse, ready for redistribution.

While there are plenty of things that can’t be turned into bits, anything that can be, will be. The image of the lonely bit salesman pounding the pavement, moving bits from “here” to “there” with shoe leather and a big sample case is now the stuff of memoir, museums and fiction.

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Cluetrain: Any Dream That Ships Without A Mouse, Ships Broken

Published May 2, 2009 by cgerrish

On the tenth anniversary of the Cluetrain Manifesto, Doc Searls had some thoughts about clue number 71. Click the link and read them yourself, it’s worth the effort. My takeaway was that we have lived in a world where we have to subscribe to vendors, but vendors don’t have to subscribe to us.

71. Your tired notions of “the market�? make our eyes glaze over. We don’t recognize ourselves in your projections—perhaps because we know we’re already elsewhere.

In prehistoric times, there were three networks that locked down the channels of attention. These focused audiences provided a large target to whom they could sell the equipment required to enact the American dream. It was a dream pre-dreamed for us by professionals experienced in the business of dreaming dreams.

When the audiences began wandering off, spending their attention on dreams not listed in the handbook– the new imagery was incorporated. The channel had one direction so it seemed as though the dream manufacturers had tuned in to the spirit of the times. New images appeared in the dreams, although something wasn’t quite right.

When you control a uni-directional channel, you can overplay your hand. But, of course, the channel doesn’t really only go one way. And what can be co-opted by one set of players, can result in subliminal blow back on another frequency.

Tw*tter has distracted a sizable section of the audience from the crumbling remnants of the prehistoric attention focusing machines. The new channels are now being flooded with celebrities to refocus the audience’s attention. The analysts and consultants are conspiring to brew up a formula that can painlessly transport the brands to the new medium with their self-dreamed power and status intact. It doesn’t do to tell the powerful that the basis of their power is dissolving without providing an escape route to the next peak poking through the clouds.

The brands have sent their robots to follow me on Tw*tter. They’ve analyzed my tweets and have determined that I’m a customer– or potentially could be one. They’re listening to my broadcasts and sifting through them to build a profile to create an automated relationship. The polarity of the channel has been reversed. The brand subscribes to me– but I’ve yet to set the terms of that subscription. I can choose to reciprocate and subscribe– or I can block a brand that gets out of hand. The brand has its legacy communications channel that can be correlated with the new channel. They’re hoping this new combination will be more powerful than ever.

We are what we do with our attention.
– John Ciardi

The cognitive surplus of our attention has been held spellbound for decades. Ten years ago, when Doc Searls said “we know we’re already elsewhere,” he paired that with the reaction “our eyes glaze over.” In other words, we withdraw from the world with which we’re confronted. In the ten years since, we now listen to Clay Shirky say, “any dream that ships without a mouse, ships broken.”

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Adam Smith, Power Laws and the Social Networks of the Ant Colony

Published April 29, 2009 by cgerrish

To support a conjecture in the world of humans, we often point to the natural world as some kind of final arbiter. “You see, this is the way it works in nature, therefore this is the way it is.” Aesop’s fable about the Ant and the Grasshopper has been used in this way in political circles for years. The social behavior of ants and bees has also been of particular interest to those of us thinking about the complex digital social networks emerging all around us. We take the folk wisdom of Aesop as gospel, and using that tool, we make an attempt at interpretation. Ants are industrious, collective and coordinated. If only people could join together in such a natural kind of cooperation. It’s only our human foibles that prevent this return to Eden.

Meanwhile, Anna Dornhaus, a professor of ecology and evolutionary biology, has been painting ants. She does this so that she can track the individual behavior of a particular ant. Despite the anthropomorphism of Aesop’s fable, we tend to think of ants as a swarm of ants– as a collective. In a fascinating profile of Dornhaus by Adele Conover in the NY Times, we discover that:

“The specialists aren’t necessarily good at their jobs,�? said Dornhaus. “And the other ants don’t seem to recognize their lack of ability.�?

Dr. Dornhaus found that fast ants took one to five minutes to perform a task — collecting a piece of food, fetching a sand-grain stone to build a wall, transporting a brood item — while slow ants took more than an hour, and sometimes two. And she discovered that about 50 percent of the other ants do not do any work at all. In fact, small colonies may sometimes rely on a single hyperactive overachiever.

A few days ago I was re-reading Clay Shirky’s blog post on Power Laws and Blogging which describes the distribution of popularity within the blogosphere. In his book, Here Comes Everybody, he expands this idea of self-organizing systems and power law distributions to describe how things generally get done in social networks like Wikipedia. Aspects of the process have also been described by Yochai Benkler and called commons-based peer production.

Shirky’s work combined with Dornhaus’s gives you a view into the distribution of labor within the commons of a social network. Benkler’s “book” The Wealth of Networks is a play on Adam Smith’s The Wealth of Nations, and in Dornhaus’s experiments we find some interesting contrary data to Smith’s conjecture:

My results indicate that at least in this species (ants), a task is not primarily performed by individuals that are especially adapted to it (by whatever mechanism). This result implies that if social insects are collectively successful, this is not obviously for the reason that they employ specialized workers who perform better individually.

As Mark Thoma notes, Adam Smith cites three benefits from specialization:

The worker would become more adept at the task.

The time saved from not changing tasks.

With specialization, tasks can be isolated and identified, and machinery can be built to do the job in place of labor.

As we begin to think about the characteristics of “swarming behavior” within digital networks, we can now start to “paint the ants” and look much more closely at how things get done within the swarm. Digital ants may all behave identically, but ants as we find them in nature behave unpredictably. Rilke notes that “we are the bees of the invisible,” but is a bee simply a bee?

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