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Analog to Digital

There is a great interview with Thomas Peterffy on NPR’s Planet Money podcast this week. Mr. Petterffy is credited with bringing computers to Wall Street. In the clip below, he talks about how he cut the cord to his NASDAQ terminal and patched it into the back of a computer so that his trading algorithm could automatically buy & sell shares based on the the numbers it was reading off the feed. NASDAQ noticed the volume of trades coming over the wire from his company, and when they realized that all these trades were being executed by one computer, they pointed to a line in the user agreement that said that all trades needed to be entered, “using the keyboard.”

Peterffy and his engineers then devised a “rubber hand” attached to the computer that got around this absurd rule. The robot entered all trades via the keyboard in order to comply with the rulebook but, as Petterffy notes, on busy trading days the clacking of the robot hand on the keyboard got so loud that people in the office had to wear earplugs.

This story brought back memories of a similar, absurd set of rules that I witnessed at the Osaka stock exchange. The Nikkei future contracts were traded on the Osaka stock exchange and they had a strict set of rules that said that you could only trade these futures if you had a seat on the exchange and had staff in an office within a certain distance of the exchange. This was enforced by a rule similar to the NASDAQ rule that prohibited digital quote feeds from the floor. The only feed you could get was a video feed showing the prices and this feed could only go a certain distance from the Osaka Stock Exchange (OSE). This was, no doubt, a way to force high net worth financial firms to keep an office in Osaka. The problem was, the Morgan Stanleys of the world had a hard time convincing anyone to live in Osaka to work the Futures floor.

I worked for a US Securities firm based in Tokyo at the time and we got around the OSE rule in a clever way, not too unlike Peterffy’s robot hand. We rented a small office across the street from the OSE and installed one of their proprietary video terminals that they give to those with a seat on the exchange. In this office (which was essentially a closet), we put a camera trained on that terminal screen. We then had a computer parse that images from the camera and used software to read the numbers and turn them into digital bits which we then sent to our Tokyo traders via a leased line connection. With this home grown digital ticker feed of the futures contract numbers, our traders could run their trading desk remotely from Tokyo.

The only issue was earthquakes. Whenever there was a strong temblor, someone from the IT department (where I worked) would have to get on a bullet train to Osaka (about 3 hours away) and go to that small office to adjust the camera and re-calibrate the software that parsed the video signal and turned numbers into a digital feed.

The digitization of analog content transforms every business it touches. When you turn a musical performance into an .mp3, a movie into an .avi , or a newspaper into an .html file, it can be duplicated and transported at no cost. We think digitization is a recent phenomena but the interview with Thomas Peterffy reminds us that this transformation hit the financial services first. Shortly after the Peterffy robot, NASDAQ lifted its rule restricting computerized trading and today, more than 50% of all trades are entered automatically via computers running trading algorithms.

The robots are taking over. As we look at events such as the Flash Crash of 2010 and the Knightmare of 2012, we should be taking notes to see how the pursuit of efficiency may impact other industries that are turning to automation.

Transfer Funds by Simply Dialing

I’m still in the Gee Whiz phase of my learning about the mobile phone industry. The ease at which someone uses SMS to text a cab reservation in Helsinki taught me to look at SMS as a command line for the real world and today I’m learning about mobile SMS banking.

My colleague Jan Chipchase (his blog, Future Perfect, which covers culture and technology is fascinating btw) points to a video which (complete with “natty soundtrack”) shows SMS fund transfers in action in rural India.

Just as parts of Eastern Europe skipped over laying telephone cables and went straight to cellular, the third world, where there is no established banking infrastructure, is jumping ahead to mobile electronic banking.

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Current Events

Thomas Jefferson on the Credit Crisis

I leave you with this quote to ponder over the weekend.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

– Thomas Jefferson, 1802

Thanks to Ian Copsey, a forex analyst in Asia, for sending this one on.

UPDATE: Re-posting on Facebook yielded some interesting commentary. According to his wikipedia page. TJ died deep in debt, much of it caused by out of control banking policies. This background puts the above quote in greater context.

Although he was born into one of the wealthiest families in North America, Thomas Jefferson was deeply in debt when he died. Jefferson’s trouble began when his father-in-law died, and he and his brothers-in-law quickly divided the estate before its debts were settled. It made each of them liable for the whole amount due – which turned out to be more than they expected.

Jefferson sold land before the American Revolution to pay off the debts, but by the time he received payment, the paper money was worthless amid the skyrocketing inflation of the war years. Cornwallis ravaged Jefferson’s plantation during the war, and British creditors resumed their collection efforts when the conflict ended. Jefferson suffered another financial setback when he cosigned notes for a relative who reneged on debts in the financial Panic of 1819. Only Jefferson’s public stature prevented creditors from seizing Monticello and selling it out from under him during his lifetime.

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Current Events

US Mortgage & Credit Crisis, How did we get here?

I could never figure out how banks and securities dealers talked themselves into loaning money to people that common sense would tell you never could repay their obligation. Listening to this episode of This American Life – Giant Pool of Money revealed that it was incremental greed that drove each link in the chain to justify the crazy loans that were extended – a kind of slow boiling of the frog – which gradually upped the ante until the market could no longer sustain it.

A vital oversight often overlooked was that with the Mortgage-Backed Securities that were famous for bundling up poorly graded loans with a few high-performing loans to basically pretty up a pig, the complex risk management tools that were used for analysis failed completely because of the lack of historical data.

Very simply, no one had ever extended credit under such situations before (i.e. NINA loans, No Income, No Asset) so they assumed an overly optimistic rate of default and dealers let the computer models talk them into taking on loans that just didn’t make sense.

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Current Events

“Suddenly, at about 3 p.m. Eastern time, the Dow industrials fell out of bed”

Computers that calculate the DJIA at Dow Jones are fingered as the culprit in yesterday’s late-day freefall of 200 points. The Wall Street Journal, published by Dow Jones, covers it in gory detail in a cover story in today’s paper.

Behind the scenes, the team that compiles the DJIA had noticed at about 2 p.m. that heavy trading volume was overwhelming the system, creating a data backlog that was affecting all of the Dow Jones indexes.

The Dow’s component stocks were falling, but — improbably — the Dow average wasn’t falling as much. Just before 3 p.m., the team switched over to a backup computer system. Almost immediately, the Dow caught up, tumbling 200 points, for an eye-popping plunge on the day of more than 500 points.

You could probably hear the “hiss” coming out of the world economy as all those Sell orders got matched up and executed. How would you like to be the dude at his console that threw that switch?

4.07 billion shares traded hands yesterday. The heaviest trading day ever for the New York Stock Exchange