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Imagine hi res trading replace crowdfunding and VC:s

December 20, 2012

TradingOne main aspect of digital revolution is that it opens completely new business models and mechanisms in an industry, such as Spotify’s model with streaming music as opposed to downloading and owning music files or even cd:s.

In an earlier post I selected six industries that will be hit next by digital revolution, and one of them is finance and trading.

This is already an extremely computerized sector where demand is not focused on economists any longer, but on experts in mathematics, statistics, computer science and programming. The computer systems that are being used are among the most powerful in the world, competing in the nanosecond range on sell and buy orders in automatic trading.

You might conclude that we have already seen the shape of future digital trading. I believe we haven’t.

I already pointed out that what’s going on now is a search for better models which can help outperforming competitors when you cannot beat them with speed and computing power only. The models need to include information on history and future and also people’s and markets’ sometimes irrational behavior, thus being much more complex than a model for physical systems.

But what’s more exciting is trying to understand what happens next.

There’s no reason to believe that automatic trading will go away. On the contrary, it will become progressively more accurate and powerful, with models that are gradually more capable, using technology such as artificial intelligence and increasing amounts of data.

You could compare this with the development of digital cameras with an ever increasing resolution making digital photo capable of capturing finer and finer details of reality.

I expect the same evolution in trading. Automated systems will eventually be so powerful and have such a high resolution that you can have markets with not just a couple of hundred companies, but thousands or even millions.

IPO’s could be handled automatically and any company, no matter how small, could go through this process at any moment, in real time, 24/7.

Meanwhile anyone could invest any amount according to specific criteria and might have a quite predictable return on investment as the number of invested companies will be big enough to create a certain statistical stablilty.

In this way, functions that are taken care of by venture capital and crowdfunding today could be incorporated in automated trading systems.

Instead of turning to a crowdfunding website or a VC firm, a small startup or group could just apply for an IPO in minutes and receive funds according to the sum of intelligent systems’ assessments of the business idea, or possibly even of a non profit project.

I admit that I know little about the theories of perfect markets, but in an intuitive way such a system could very well be described as something that approaches a perfect market, with progressively increasing resolution.

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