nettime: Financial Networks as Networks

[Felix Stalder <stalder@fis.utoronto.ca>]

Dear Net-timers,

The following is a paper that I wrote in the context of my involvement
in the McLuhan Program in Culture and Technology at the University of
Toronto. I post here only an excerpt [the introduction and the
'conclusion'] because the whole paper is about 25 pages. If anyone is
interested, I can provide the full text upon request.


Felix

-------------------

�The two great inventions of the human mind are writing and money�the
common language of intelligence and the common language of
self-interest.�
Mirabeau


1. Introduction

Karl Marx wrote in Grundrisse, Foundations of a Critique of Political
Economy (1857): �Money as medium of circulation becomes coin, mere
vanishing moment, mere symbol of value it exchanges. ... As the most
superficial (in the sense of driven out onto the surface) and the most
abstract form of the entire production process [money circulation] is in
itself quite without content.� In this sense, money circulation  is a
�pure medium�, much as light was a pure medium in the eyes of Marshall
McLuhan, a medium without content.

The underlying thesis of this short paper is that financial networks
offer a uniquely transparent view on the dynamics of networks in their
pure form. The nature of networks itself becomes visible in the workings
of the financial markets.

The financial markets are, unlike any other aspect of today�s economy or
culture, completely embedded in computer networks, many of it�s
instrument are unthinkable in any other media environment. Their
phenomenal growth over the last two decades is a direct result of the
power created by the linking of high-end computational hard- and
software with nearly unlimited, or at least abundant,
telecommunicational bandwidth .

The area of electronic money can serve as an empirical testing ground to
discern patterns that will be more difficult so see in other areas where
they are likely to be �distorted� as they form combinations with
patterns of other environments, their different natures and modes of
structuring.

The goal of this paper is mainly to test a number of speculations and to
present preliminary results.

The first section will sketch the origins and the present state of the
financial markets , the second section will describe some of its
mechanisms and the tools employed and the final section will interpret
the findings in the light of their �networkness�, it will try to
abstract from the empirical evidence, an analysis of the inherent
culture  of networks. 


[sections two and three available upon request]


4. The nature of networks

4.1. Networks as environment
Financial networks provide their own complete environment. They are
content and context at the same time. The surrounding larger social and
economic environment is structurally separated and its relevance is
relevance is assesed regarding whether it has the ability to invade the
closed universe of the financial market, for example in form of new that
are regarded as important. But which information is important and which
is not is decided within the markets and has nothing to do with the
�value� of the information as such. The context of the market defines
the content of the information. If everyone expects a company, or a
country, to report huge losses, then the news of moderate losses can
boost the price or currency, in contrast, if everyone expects the
opposite then the same piece of information can have a devastating
influence on the market value.

As a complete environment the (financial) networks are fully
self-referential, or to quote Marshall McLuhan: �New media are not
bridges between man and nature, they are nature." Everything that counts
is what happens within the networks. What are the other participants
doing? Since the direct connection to other environments, or subsystems,
is broken, the ultimate determination takes place within the markets
themselves. Evidently, the markets react very fast on new information
and the connection to political and economic events is almost immediate.
Nevertheless, it is indirect. The markets as a closed system react on
news because its active elements, the dealers, expect each other to
react and try to react before the others. What the others plan to do is
the most important information. John M. Keynes described this structure
is his famous beauty contest analogy:

�Professional investment be likened to those newspaper competitions in
which the competitors have to pick out the six prettiest faces from a
hundred photographs, the prize being awarded to the competitor whose
choice most nearly corresponds to the average preferences of the
competitors as a whole; so that each competitor has to pick, not those
faces he finds himself the prettiest, but those which he thinks
likeliest to catch the fancy of the other competitors, all of whom are
looking at the problem from the same point of view. it is not the case
of choosing those which, to the best of one�s judgment, are really the
prettiest, not even those which average opinion genuinely thinks the
prettiest. We have reached the third degree, where we devote our
intelligence to anticipating what average opinion expects average
opinion to be. And there are some, I believe, who practice the fourth,
fifth and higher degrees.�

4.2. Face value and cooperation
Information has to be taken at face value. Its reality is as flat as the
screen where the data is displayed, its only relation is to other facets
of the same flatness, the other screen to which every screen is
connected. What makes the information different is the speed of their
circulation. In such an environment news and rumors become equally
important. And sometime rumors become even more important than news,
since they promise to predict what might be news tomorrow to everyone.
And that is the most valuable information and can actually become the
cause of tomorrow�s news. If some of the major dealers expect a currency
to loose value, they will start to sell it, which will be seen be others
as a sign that the value of this currency is falling and the result is
that, if many start to sell, the value of the currency is actually
sinking. 

For Jean Baudrillard this reversal in the relationship of sign and
object is the principal characteristic of post-modernity. In his sombre
prose he analyzes that the simulation is no longer �representational
imaginary� �rather, genetic miniaturisation is the dimension of
simulation. The real is produced from miniaturised units, from matrices,
memory banks and command models ... It no longer has to be rational,
since it is no longer measured against some ideal or negative instance.
It is nothing more than operational.� 

At first hand strange and unenvisioned in the gloomy metaphors of
Baudrillard, the effect of that reversal is cooperation. Since networks
are tools and environment at the same time, everyone who uses the tools
has a certain need to maintain the environment . This does not imply any
idyll, the cooperation is only on the level of the environment, and not
within the environment. There are exceptions to this rule, evidently.

Networks function efficiently when information can actually be taken at
face value. To guarantee this they have to be structurally separated
from other environments. In this regard the institution of the
clearinghouse can be read as a one trillion dollar per day cooperative
buffer against the invasion of external context. The clearinghouse
provides the world economy�s most substantial resources, ultimately the
funds of the most relevant firms in the markets, to guarantee the
constant flow within the networks, uninterrupted by external defaults
which would be translated directly into the network and not only
indirectly through the interpretation of the players. This direct impact
would destroy the face value of the information.  If the financial
networks are the global brain, or parts of it, then the clearinghouse is
the helmet that prevents the direct, not translated impact of the hammer
of bankruptcy from crushing the skull. Without this helmet the speed in
which the information would be allowed to flow would be much slower.

In the network environment, then, the condition of staying a member of
the network is to provide information that can be taken at face value.
The position of a player is determined by the information he, she, or it
delivers to the other players, the faster and the more accurate it is,
the more relevant the source becomes. Since everyone is connected with
everyone reliable information gets delivered to the environment as such.
The connectiveness forces even in the most competitive environments a
certain form of collaboration. What seems paradoxical is the nature of
the network, it needs collaboration to stabilize itself, building the
stage for competition at the same time.

4.3. Convergence
This connectiveness converges not only cooperation and competition, but
also the discreteness of action and reaction, event and news into the
continuity of a flow. The dealers see instantly what others do, which
builds the basis of their actions which is fed back to the other dealers
who base their decisions upon that. This constant feedback eliminates
the separation of events (before) and news (after) emerging into a
constant presence. In a constant presence predicting the future is the
most important task. Self-learning systems that can feed upon
themselves, learning through feedback become the adequate models to
interpret the patterns of that presence and its inherent future.

It is only logic that such a convergence is also expressed
organizationaly. Reuters does not only provide the news and information
about the financial markets to the markets but it also provides the
tools for the markets to make the information. Consumer of news and
producer of news converge and the network displays instantly to everyone
what everyone else does. Or, in other words, its only content are the
users.

4.4. The paradox of control
A network�s connectiveness is not only defined by its ability to
connected people over time and space barriers, its second characteristic
is its tendency to integrate formerly independent elements on a higher
level of abstraction. Abstraction allows the construction of larger
areas of control, in the financial markets through instruments such as
derivatives, but these instruments become at the same time less stable
and the environment less predictable. There are simply to many factors
to really exercise control. Increased abstraction and the possibilities
to influence ever greater area create a paradox of control.

 �The paradox of scale and control is most visible in the financial
sector where heavy investment in technologies designed to enhance the
predictability and responsiveness has been blamed for exacerbating
instability: when a multitude of different and competing actors seek to
improve their control capacities, the result at the level of the system
is a breakdown of control. What is rational at the micro level becomes
highly irrational at the macro level.�

With the number of connections and the speed of communication rising the
predictability and controllability of the system as such is decreasing. 

5. Outlook: development without control?
The interconnected environment is driven by an internal logic that is
not reducible to the planning of the small number of centers. Even
though there are clearly visible major nodes within the network they are
not in a central command position. The are in the same way
interconnected to the network at large as any smaller node. 

On the other hand, development is not random. It is the result of great
number of planned efforts to survive in that environment. Each
environment rewards its members if they use specific strategy to seek
that survival, these strategies, or rules of conduct, evolve over the
time out of interaction of the members who constantly feed back the
success of their actions regarding the reaction of the other members of
the network to readjust their own strategy. 

The two paradoxes of  networks, control/chaos and
cooperation/competition, produce two completely equally adequate ways to
describe them. Form the inside, on the level of the usage they are
complex and unpredictable, chaos and competition are dominating the
picture. From the outside, on the level of effects, they are very
predictable and unimodal, cooperation and control seem to be their prime
features.
--
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