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[¶2.] In 1992, Barings P.L.C., a small, highly regarded British banking firm, hired one Nicholas W. Leeson, installing him in its small office in Singapore. Over the next few years, Mr. Leeson made a reputation as an expert trader over the global network, using his computer, and his computer programs, to make small but significant profits on tiny differences between the prices of financial instruments in Japan and in Singapore.1 In January 1995, for reasons still not fully understood, Mr. Leeson abandoned the strategy of matching the prices of derivatives and began trading in them directly, making large purchases of futures on the Japanese stock market. These turned out badly, stimulating him to make further purchases in an effort to cover his losses and hedge his bets. But neither his purchases nor his strategies were very effective. By late February, he was threatened with margin calls, which would have required him to put up large amounts of cash to cover the options.
[¶3.] On Thursday, February 23, faced with possible exposure, he simply disappeared from Singapore, leaving behind him near contracts with a face value of nearly $30 billion and almost $1 billion in debts. The consequences were severe. Although highly regarded, Barings' capital did not exceed $500 billion. It had little choice but to declare bankruptcy and close its doors permanently.2 The ripple effects were felt throughout the world's markets. Stocks fell sharply in New York, London, and Japan, but recovered somewhat when it was realized that the Barings loss would be contained. Institutional investors as well as traders expressed the need to exercise more caution, and more control. But no specific recommendations were offered.
[¶4.] The collapse of Barings illuminates the consequences of the institutional and structural changes that have overtaken financial markets. Before the advent of computer trading, no single person of any age would have had the access and power of Mr. Leeson, nor been able to act so independently. The official report on the demise of Barings suggests that the bank was negligent in failing to supervise Mr. Leeson more carefully, or to look into the enormous profits that were being run up in the Singapore accounts. That the bank itself was otherwise engaged in the somewhat dubious practice of front-running, trading on its own in advance of major activity for clients, might also have been a contributing factor.3 This does not affect the observation that he could not have run up such huge losses without the access and range given him by the new techniques, or even attempted to do so before the creation of global markets in futures and derivative financial instruments.
[¶5.] Whatever his faults, Mr. Leeson was at worst a bad investor. In that he differs sharply from Joseph Jett of Kidder, Peabody, or Victor Gomez of Chemical Bank, who perpetrated direct fraud on their companies through access to their computers. And his mistakes were certainly less troublesome in the long term than those of Robert L. Citron, the treasurer of Orange County, whose speculation on derivative instruments tied to interest rates bankrupted it, threatening the stability of the entire American market in municipals and other interest-free securities.
[¶6.] Incidents such as these are neither new nor unique. As long as markets exist, there will be temptation; as long as information has value, there will be those who try exploit it; as long as some people are able to have direct access to company funds, and to the remote trading afforded by the computerization of financial markets, there will be those who seek to take advantage of it. And, particularly in the cases of Mr. Leeson and Mr. Gomez, as long as there are so many new opportunities for speculation and fraud afforded by direct access to internationalized secondary instruments and global financial markets, there will be those who try to make a quick killing, particularly if they do not have to bankroll their own gambles. Controlling such abuses has been one of the primary goals of market regulation. But neither national nor international governmental regulation has the means or the authority to gauge the honesty of another Jett, control the speculative activities of another Citron, or supervise the wide range of transborder activities that computers are now making possible.4
[¶7.] Self-regulation by the institutions themselves seems equally difficult, and perhaps equally improbable. The lack of oversight that characterized so many of the cases mentioned previously was at least as remarkable as the cases themselves; senior managers (or, in the case of Mr. Citron, the county government) certainly bear some responsibility for having allowed such unsupervised discretion. But according to most reports, the advent of networked computer trading had much to do with it. With direct access to markets and accounts, trades are not "vetted" as they were in the days of traditional firms, where junior people could not exceed certain limits without approval. Banks and other financial firms are having a great deal of difficulty in controlling global, networked operations, particularly when faced with the time pressures of trading volatile instruments in computerized markets.5 Moreover, as so clearly expressed by Saul Hansell in his story in The New York Times, "Another common problem is a financial generation gap. Often, the senior managers of a company who are supposed to be doing the monitoring do not really understand the complicated new instruments and take a laissez-faire attitude toward the younger financial traders who have grown up on this sort of financial Nintendo."6
[¶8.] In the long run, that may not matter. The human face of trading is vanishing. Morgan-Stanley has eliminated humans as much as possible, with spectacular success. Most trading is becoming a "no-brainer," which could eliminate intermediary brokers and other middlemen. Even poor old Bertie in Belize, whose promotion was based on his carefully acquired market intuition, will have difficulty holding his job against the latest generation of computer-knowledgeable whiz kids. And his demise may soon be followed by that of the institutions themselves. With function and skill dispersed around the net, with a web of buyers and sellers working directly via computers, who needs Wall Street, or Chemical Bank at all, other than as a convenient location to cash in profits? And with full electronic banking and accounting, with transactions and accounts moving from paper into computers, who needs locations at all?
[¶10.] In his 1984 novel Neuromancer, William Gibson, one of the founders of the "cyberpunk" genre of science fiction, coined the term "cyberspace" to describe an interactive electronic universe in which the accounts and data and information banks maintained by the world's economic and financial institutions were connected and interconnected by a vast and fully integrated electronic network.7 The hero (or antihero), a futuristic extension of today's antisocial security cracker, is given the task of penetrating this electronic web in search of valuable information. He does so by "jacking in," plugging himself into an electronic device that projects his persona into an interactive space that is more a projection than a representation of the electronic instrumentalities and interactions. Data banks and sources of information appear as large physical structures, fiercely protected against intruders by electronic defense mechanisms known as "ice"--whose effects are not just virtual, but physical, propagated out through the electronic brain implants to which the jacking device is connected.
[¶11.] Today's electronic markets are not yet as interconnected, or as well defended, as those sketched out by Gibson a decade ago, but they are evolving much faster in that direction than anyone would have predicted. Cyberspace as metaphor, stripped of the more-than-virtual reality upon which Gibson's creation finally depends for much of its action, is becoming a common term to describe the network of rapid and tightly coupled interactions by which banks and other financial institutions are moving the symbols of financial value around the globe in unprecedented volume.
[¶12.] Because direct trading in commodities, securities, and financial instruments is still constrained to some degree by the physical reality of the commodity, or the firms and industries in whose name the original shares or instruments were issued, primary markets are not as much affected by electronic trading as are secondary ones (such as futures) or derivatives. The clearest example of what the future might bring is found in financial markets. Because they have long dealt solely with the exchange of symbols and tokens, contracts and promises, they were able to react more quickly than most to the increased capacity (as well as capability) provided by the new means of communication and interaction.
[¶13.] In the days when currencies were at least in principle redeemable for actual gold or silver, trading in money had definite limits. But the world monetary system, and, in particular, that part having to do with settlements and accounts, has long moved beyond representation to social construction. All that limits transactions is the need for reconciliation of the bookkeeping. Once institutional accounting was transferred almost entirely to computerized accounting systems and humans taken out of the transfer and exchange loop, the transfer of funds between one institution and another became limited in scope and velocity only by the size of the accounts involved and technical constraints on the transfer system.8
[¶14.] As improved means for interconnection increased capacity, the volume of traffic rose dramatically. The numbers involved are staggering. According to financial consultant Peter Schwartz, who helped London make its Big Bang transition in 1986, international foreign exchange transactions had already reached $87 trillion by 1986, more than 90 percent of it generated by electronic transactions.9 By 1991, the daily flow of money in the United States was more than fifty times the amount held at the Federal Reserve for settlement of bank accounts; CHIPS, the Clearing House Interbank Payments System owned by eleven New York Banks, and the Federal Reserve were together moving more than $1.5 trillion over electronic networks each and every working day.10
[¶15.] How can the amounts be so large? Although reserves are finite, not only are electronic money transactions flows rather than stocks, they have become decoupled from the stock of underlying reserves. Transfers over the network are limited only by agreed upon rules and regulations. Before the electronic revolution, the minimum time required to move a dollar back and forth even between two banks in the same city was measured in hours. Now it is measured in fractions of a second, and the same symbolic dollar can move back and forth between continents many times in only a few minutes.
[¶16.] More rapid and frequent transactions in greater volume have essentially decoupled financial flows from movements in primary markets, or anything else connected with real-world economic activity.11 Moreover, the size and complexity of the resulting flows, as well as their increasingly tenuous coupling to physical realities, has already led Schwartz and others to foresee the coming of "virtual reality" software that models the financial marketplace in three dimensions, perhaps representing each institution differently according to its reserves, the rate of activity, and the ease of doing business with it.12 And of course, this virtual software would have to include even more robust defenses against attack by intruders and criminals than does the present system. Cyberspace indeed.
[¶18.] As the financial world shifts over to an all-electronic system for transactions, the consequences of possible failures, whether of systems or of confidence, have become a matter of serious concern. Global markets in particular are now so dependent on electronic transactions that a single serious failure, or a case of fraud or theft that causes loss of confidence in the honesty or accuracy of transactions, would be extraordinarily costly. Indeed, there have already been some reports of electronic theft or fraud, some of it systematic, even if not (yet) at the scale of underground warfare glorified by the cyberpunk novelists.13
[¶19.] The temptation for intrusion into financial and other global markets is enormous, particularly since even the siphoning off of several million dollars would be noticed only in the final accounts; it would hardly be detectable given the volume of trading. As a result, financial and other institutions have made huge investments in secure encryption. Improvements in dual-key encryption, the most secure method, were on the verge of putting security almost theoretically beyond reach when the U.S. government stepped in, insisting on a method that would provide federal agencies with a passkey of their own. The resulting debate vividly illuminates the new range of issues appearing as indirect and secondary effects of the technological transformations that are accompanying the efforts to exploit the new technical capabilities of rapid, integrated, computer-based communications.14
[¶20.] The government's argument is that the availability of secured and encrypted networks for communication would provide to criminals a means of reliable coordination and interaction without fear that anyone was snooping or eavesdropping. Pornography, for example, could move freely over the net. Drug deals or terrorist planning could take place openly and without fear of eavesdropping. And large sums of money could be moved around rapidly and undetectably, either for the purposes of organized crime or to evade taxation. Encryption would interfere with snooping and reduce the opportunity for infiltration, two of the favored tools for penetrating such operations. The remedy was to propose restrictions on public codes of a specific degree of complexity (and therefore security) to those for which keys were available, and to further prohibit any unkeyed encryption beyond the government's capability to crack.
[¶21.] The results were about as would be expected. The initiative was opposed both by libertarians promoting web democracy and by businesses and other individuals seeking to ensure maximum security for communications and transactions. Meanwhile, those financial and other firms who could afford it began to move to private networks not subject to the government's restrictions, and therefore also not subject to any form of governmental regulation or control.
[¶22.] Few of these issues have been resolved as of this writing, and it is not certain how, or when, they might be. What is most interesting from the point of view of this book is how well they illustrate the ways in which the creation and expansion of new technical capabilities, even those as narrowly defined as better ways of moving bits of data between computers, may cause long-term and indirect effects that strongly alter the way in which people visualize and interpret their status and role in society, both with regard to relationships with governmental actors and with regard to other forms of social interaction.
[¶23.] Nor is the action of criminals the only concern where international markets and international networks are involved. The range of possible actions, legal, illegal, and of uncertain status, of legitimate traders seeking to exploit gray areas of behavior in the evolving electronic markets is as difficult to imagine and anticipate as that of presumptive criminal outsiders trying to attack them. Only constant monitoring would allow real-time control of, for example, traders seeking to manipulate markets to their own ends during off-hours or other slack periods.
[¶24.] Trading within formal rules has historically always had some regulation and control imposed upon it, even if that finally is no more than a moral code imposed to provide enough visible proof of fairness to encourage market outsiders to participate. But none of the regulatory strategies, formal or informal, that have historically been used to ensure market stability and fairness will likely be able to fully address the problems of safeguarding the increasingly complex, rapid, and automated electronic trading networks of the future. It is difficult at this point even to imagine what some of the possible modes of fraud and abuse might be. What we can learn from the history of human affairs in general, and markets in particular, is that this is one of those areas where human creativity exerts itself to the utmost.
[¶26.] The question of the stability and predictability of markets that have been fully converted to electronic trading is also still unresolved. The computers are playing a quick-response interactive game with open rules, incomplete information, and small but significant time delays. This can at times result in various modes of delayed feedback, positive and negative. Physical exchanges and human intervention provided a damping factor that usually prevented such mechanisms from running away.15 The result could well be formal chaos; an interactive, aggregate system whose responses and fluctuations may be more a characteristic of the system itself than of any external factor.16 If that is so, the market may rise, or fall, or crash, without warning.17
[¶27.] Considering the enormous concern that surrounded the loss of communications, or access to trading computers, in the wake of the market crash of 1987, or any other event that interrupted the normal flow of activity in computerized markets, it is remarkable that their vulner-ability to a severe disruption, or to sudden loss of any of the major players, has never been carefully examined. Nor is it clear how effective are the measures that firms have taken to ensure their own continuity and records. Distributed computing has penetrated organizations so quickly that few have completely adapted to it.18 Following the bombing of the World Trade Center, data recovery experts had many harsh words about the backup and recovery status of LANs and file servers. The loss of data after major disasters, or from servers and networks that are globally rather than locally linked, would be far more serious.
[¶28.] In a tightly networked system, particularly one such as global finance where electronic records are becoming primary, any incident that disrupts one of the major actors or major trading sites disrupts all. Manifest disarray, or uncertainty over the status of records and transactions, could have an aggregate ripple effect (e.g., through temporary withdrawal resulting from loss of confidence in the accuracy of trading) that far exceeds the direct costs to the organization or center involved, or, through the kind of feedback seen in 1987, drags markets down because potential buyers cannot gain access.
[¶29.] What is not known is the extent to which networked global markets are sufficiently robust, or sufficiently resilient, to absorb negative incidents ranging from a hacker attack to a bombing, or, if they are, what will happen if they are tested beyond the expected limits. In traditional, localized, nonautomated market systems, the human actors, and their written records, were the ultimate repository of information. They knew that if all else failed (and there was little else to fail), the market could be restored and the data recovered, even if they had to go back to trading by hand, or in closed rooms.
[¶30.] Those who transfer funds, securities, bonds, or derivative instruments over the face of the globe, along electronic networks whose details and structure they do not understand, between computers and computerized databases they do not fathom and cannot program or query without professional help, do not have that comfort. In that respect, they are similar to air traffic controllers deprived of their paper routing slips, or pilots flying aircraft with no manual controls. The difference is that the pilots, and the controllers, are very aware indeed of what the costs of loss of control would be. It is not at all clear that the same is true of those who are striving for further electronic sophistication in market systems in search of competitive advantage.
[¶32.] There are two competing visions of the emerging electronic markets. One, based on market experience, tradition, and the conventional social myths of the markets' meaning and purposes, asserts that the risks are minor, manageable, evolutionary, and constrained by objective reality.19 The other, based on a less optimistic and less politically conservative view of the dynamics of technology and society, fears that the market will become deconstructed and fragmented--increasingly abstracted from historical and objective context, and increasingly separated from experience and tradition.20
[¶33.] Such fragmented markets, stripped of context, manipulating arcane symbols and eluding the understanding not only of regulators but also of the elites who create and operate them, seem to fulfill the nightmare visions of postmodern economics.21 Wall Street was salvaged following the October 1987, crash by those who retained a vested interest in its well-being. But they were operating on a single, national market, with an electronic and communications network of limited scope, and limited trading capabilities, and within the known time boundaries of traditional trading hours.
[¶34.] The outlines of the future system are at best only dimly visible. Global trading is still in its infancy. Most twenty-four-hour trading at present is in foreign exchange, and many traders with formal twenty-four-hour profiles appear to maintain these more for the sake of presence and status than for the trading itself.22 Global stock indexes and information systems have arrived, but despite all the hype that surrounded it in the late 1980s, round-the-clock, round-the-globe trading still has not.23
[¶35.] Some critics, such as Stoll, argue that it will not, using as an example the failure of Reuter's Globex system to create electronic trading on commodity exchanges.24 After several years of operation, trading still takes place mainly on the floor on the Chicago exchange, as it does on London's Financial Futures Exchange. Stoll argues that the reluctance to move, despite demonstrable gains to be made in efficiency, is based partly on conservatism and inertia, and partially on the costs of running and participating in a twenty-four-hour market. More important, in his view, is the recognition by experienced traders that their expertise will be seriously devalued if the nature and structure of trading is significantly altered.
[¶36.] But most analysts believe that such an evolution is inevitable, driven by competition if nothing else, that global markets will grow in scale and volume and become accessible around the clock by integrated analytic and communications networks larger in scope and effect than any of the individual markets they affect, operating by rules even more arcane and abstracted from historical myths than the markets themselves. There is every reason to be concerned that the Crash of 1987 could be replicated on a larger scale, over a wider range of economies, and without the pliability to remedial action that saved the NYSE.25
[¶37.] The remedies that were suggested following the 1987 crash seem modest in the extreme.26 Even so, many were rejected by the financial community as excessive. Halting trading altogether in a crisis would be as likely to exacerbate as calm a panic; meanwhile, increased access to other markets via global trading systems would spread the effects around the world. What have been implemented are specific restrictions on program trading, stricter controls on futures markets, and other "circuit-breaker" mechanisms that call for a temporary halt to program trading when the index moves more than a certain range.27
[¶38.] These are likely to be increasingly ineffective as trading becomes global, and far too slow for rapid response systems such as futures or currency. Volatility is making governments increasingly nervous, while the push for efficiency is exerting a constant pressure to move toward more powerful computerized trading that can only increase volatility. Moreover, the costs of retrieving the Crash of 1987 and a later minicrash in 1989 have caused many to become more cautious about intervention.
[¶39.] Even if intervention is attempted at a national level, it may still fail because of the dynamic that results from trying to reconcile cross-national markets, methods, and objectives. Some nations are bound to continue to heavily favor the free-market approach, arguing that regulatory costs are inefficient and drive participants to less regulated competitors. Given the new structure of the electronic net, firms and individuals would simply shift their base of operations to the least regulated locations. This could lead to what OTA has characterized as "regulatory arbitrage," in which regulatory supervision of all markets is steadily driven downward to match the level of that in the least regulated.28 Over time, regulation would cycle down to the vanishing point.
[¶40.] The result would be a world where the demise of existing regulatory structures would not lag far beyond that of fixed markets and the large, internally differentiated and vertically integrated financial institutions that grew up around them, leaving behind a truly dispersed net of aggressively independent, unregulated, highly competitive firms, each seeking competitive advantage by any means available. Such postmodern anarchy would more closely resemble the classic Hobbesian world of each against all others than the visions of virtual community and cooperative enterprise put forward by the technical optimists.
[¶42.] Even in its infancy, global, computerized trading already poses challenges for regulators and governments, which is why Congress asked the Office of Technology Assessment to add to its extensive review some prognostications about the future. Charged with looking across the broad range of technical, structural, and regulatory possibilities, OTA put forward three dominant scenarios: gradual evolution from present arrangements, radical change from severe market disruption, and the initiation by markets and institutions of an entirely new set of rules and procedures.
[¶43.] The first scenario leads progressively toward global cooperation. Bilateral agreements slowly expand to regional and then to global scale. Outstanding differences over technical, structural, and regulatory matters are resolved one by one into a stable, overall framework. Or, in a more extreme variant, a period of weak economic growth and poor market performance leads institutions and markets to convince governments that radical movements toward integration are required. The result is much like the above, but less gradual. This vision is gentle, optimistic, and emphasizes cooperation, much like idealist views of the future of international politics.
[¶44.] The second and third scenarios are less optimistic. In the second, some event (e.g., a Tokyo earthquake, a major scandal in London or New York) triggers a crisis in markets already stressed by weak economic performance or structural or technical deficiencies. The major disruption that follows creates the political will to establish an international regulatory regime around a new international financial institution of even greater scope and authority than the World Bank or the International Monetary Fund. This agency then becomes the engine for global integration.
[¶45.] The third scenario is much like the second, but triggered by an endogenous event, such as a crisis of investor confidence. Bear markets and economic downturns slow market growth, and efforts at further international cooperation fade under national regulatory and protectionist pressures. Once again, a central institution is created on a global scale. But this institution is more like a central police force than a financial parliament, and would have to be given an effective arm with which to impose punitive damages if unheeded.
[¶46.] On the surface, these three scenarios differ widely. On second look, what is more notable is that all three cases lead to outcomes in which the historical concentration of power will persist, or even increase. This seems very much out of step with the conclusions being reached by other analysts, and with the evolutionary course pointed out in this chapter and the previous one. Why have OTA and so many other political actors spent so much time and effort on constructing in great detail scenarios that increasingly diverge from visible trends? One possible answer is that OTA is also a governmental entity, and believes in the vision of governments as the indispensable agents of legitimation and control.
[¶47.] Complementary to the OTA view is that of analysts from the traditional financial community, which is framed by the assumption that an integrated, worldwide electronic marketing network will contain no surprises because it is the creation of their will.29 The political community simply reverses that causality, and, in the face of considerable contrary evidence, asserts that governments can always choose whether or not to control the effects of technical development, that it is a matter of will, and of politics, and not of technology.
[¶48.] Neither is willing, nor able, to abandon their traditional beliefs, to challenge the basis or relevance of their historical behavior, or to admit that they are losing control of processes they themselves had nurtured. The financial old guard seems not to have considered the extent to which both its legitimating myths and the social and historical contexts in which they were created are being rapidly deconstructed by the technological forces they so eagerly embraced. In that, they are probably acting no differently than other firms, in other sectors of industrial economies, for whom the evidence is less clear and the effects more subtle. James Q. Wilson once used as a metaphor for the description of mechanistic regulation the notion of a "dead hand" on the throttle, taken from the lore and language of railroad engineering.30 It seems equally apt here, and perhaps more consequential.
[¶50.] Primary markets trade in notional pieces of paper that are said to represent the actual business or company in which one invests. Secondary markets such as those in futures or interest rates instead represent bets (or, more politely, educated guesses) on primary market movements. The new electronic markets make possible a definitive move into a state of higher abstraction where the movement of movements can become the center of activity, creating derivative markets increasingly decoupled from the value of the industries and firms in whose name the original paper (if there was paper at all) was issued.
[¶51.] The paradoxes of risk and opportunity are clear. Extensive program trading requires constant monitoring and intervention via computers and computerized networks, but the growing volume of computer trading can marginalize or displace market experience. Market volumes and profits have increased greatly, but program trading tends to drive out small investors, and has been blamed for increased volatility and destabilization. Global trading via telecommunication and information networks opens world markets even to individual investors, but raises the prospect of rapid and destabilizing movements of capital across national boundaries. Integration of computers and information systems makes rapid decisions possible, but the rapidity with which actions can take place and the increasingly tight coupling between and among them may prove to be destabilizing.
[¶52.] Thus far, the benefits have been clear and the risks problematic, and the push for change therefore continues unabated. As the coupling among exchanges, and between exchanges and trading computers, becomes more important than the coupling to the real word of economics and finance, the electronic networks that the markets created will gradually supplant them not only as the focus but also the locus of major financial activity. And if present trends continue, electronic trading and computerized, programmed responses will increasingly replace estimates of the "value" of corporate stocks, or currencies, with prices negotiated automatically by computerized programs that deal purely in symbols.
[¶53.] As with so much of science fiction, the visions of the future offered by Gibson appear in retrospect to have been prescient. As trading moves from exchange floors to electronic networks, the computerized databases are becoming the "real" repositories both of the assets and of the rules, models, and calculations that underlie their trade. The links between them are creating a network of cross-market and cross-national trading that has been characterized as anywhere from confusing to bewildering to simply beyond understanding.31
[¶54.] The regulation and perhaps even control of global, computerized trading is not, in principle, an impossible task, but for a variety of reasons, social and political as well as technical and regulatory, it is likely to be a difficult one. As Passell has noted:
What all the experts fear is what they do not know. Could the technology of funds transfer outrace the mechanisms of control, as it may have done in the early days of CHIPS? Could Wall Street, in its relentless quest for new products to peddle, invent one that unwittingly destabilizes the payments system? Could a competing payments network offshore, operating under other rules in other time zones, generate some perverse synergy that fatally damages [it]?[¶56.] Almost anything is possible, suggests James Grant, "in a world in which the electronic leverage--the ratio of newfangled photons to old-fashioned banking dollars--is enormous."32
[¶58.] Because financial markets trade mostly in symbols, and have always sought faster and more complete information, they are not only the most willing but also the best adapted of the large, complex institutions of modern societies to accept and incorporate computer-based, integrated systems as fundamental and constitutive elements of operation and communications. It is doubtful that any other large technical system would or could move as quickly, or as dynamically, particularly those that deal in products and other tangible artifacts. Even within the domain of markets, those that trade in futures or finance have moved more quickly and irreversibly than those trading in commodities or other instruments more closely coupled to physical reality.
[¶59.] If global markets continue to grow and integrate, they will become important because of the long-term social and cultural effects that the loss of general and public control over such an extensive, major segment of economic activity would have on individuals' perceptions of their role and status in society and the degree of control that they personally can exercise, alone or in combination, over large institutional actors.
[¶60.] It is, of course, possible that the current wave of computerization of markets will go not much further, or may even contract, that the futurist vision of global electronic trading around the clock will prove to be just that, a vision, and that traditional players with traditional interests will reassert control over markets and mechanisms, if for no other reason than to defend the value of their carefully nurtured expertise against computer-trading whiz kids. If that is so, they will set an interesting precedent, for the displacement of expertise is a more general phenomenon that is taking place as the result of extensive computerization, with consequences that will be discussed in detail in the next chapter.
[¶62.] Some events in the world move faster than one can write about them. When I submitted the prospectus of this book in 1990, the volume of trading in derivative financial instruments worldwide was about $4 trillion, and the instruments were considered to be interesting opportunities with some risk. By 1994, when the first draft was completed, the volume had risen to $10 trillion and was growing rapidly, and leading economists such as Henry Kaufman and Alan Greenspan were already expressing their concern, both over the volume of the trading and the nature of the traders. In early 1995, the collapse of Barings P.L.C., and the impending bankruptcy of Orange County, triggered another wave of even more serious concern.
[¶63.] On July 21, 1995, the weekly WNET financial show, "Adam Smith," analyzed the role of derivatives in the Barings collapse, and, the following week, ran a special show on the derivative traders in which they were compared to "rocket scientists," operating highly sophisticated equipment and working through remote sensors on the basis of elaborate and perhaps untested mathematical models.33 The traders were shown in their electronic control centers; surrounded by video screens and computers, they did indeed look like a cross between mission control in Houston and the set of "Star Trek."
[¶64.] The show went on to make a series of further points: that the traders were generally young, technically skilled, and willing to take risks; that the older and more cautious members of the firms they traded for often had at best a very poor understanding of what derivatives were, let alone the nature of the market; that by their nature and the nature of their trading, derivative markets were not only more volatile than traditional ones, but capable of moving very much faster; that the computer models and computerized trading programs they worked with had never been tested in a crunch, let alone a real crisis; and that such traditional notions as market equilibrium had no real meaning for a fully computerized, high-speed global market trading in instruments that were based entirely on calculations and prognostications of what other markets might or might not do.
[¶65.] With businesses now trading around the clock as well as around the world, global trading in derivatives was originally intended to create a series of hedges for business against worldwide movements in exchange rates, commodity prices, or other factors not under their control or even the direct or regulatory control of their home governments. What it seems to have created instead was described in the show as something between a space shuttle launch and a video game, played in a not-yet-virtual space where only the new generation of traders feels entirely comfortable.
[¶66.] The show was full of wonderful images used to graphically illuminate the arguments: Frankenstein's monster, nuclear explosions, Cape Canaveral, video games such as "Mortal Kombat." But the most telling image, and the most lasting, was the explosion of the space shuttle Challenger. Point made.
NOTES:
1 Hansell, "Rogue Traders."
2 "A Falling Star: The Collapse of Barings."
3 "Demise of Barings."
4 Lacking the ability to actually regulate, many states are considering a complete ban on trading in derivatives and other speculative instruments by government agencies and entities.
5 "Bankers Marched in Two by Two."
6 Hansell, "Rogue Traders."
7 Gibson, Neuromancer.
8 Kurtzman, Death of Money. Things may not be quite as bad as portrayed by Kurtzman, but the overall construction is accurate.
9 Rheingold, Virtual Reality, 369.
10 Passell, "Fast Money."
11 As quoted in Rheingold, Virtual Reality, 369, "The value of currencies are no longer determined by trade volumes or any of the physical activities normally associated with industrial economies." Also see note 8 above.
12 Rheingold, Virtual Reality, 371.
13 The possibilities of electronic theft or fraud, as well as the possible consequences of electronic or network failures, seem to have attracted more press than analytic attention, even though some instances have already occurred. For an excellent summary, see Passell, "Fast Money."
14 The literature on encryption, the Clipper Chip, and the public domain "Pretty Good Privacy" code is enormous. Among the more useful reviews are. U.S. General Accounting Office, Information Superhighway; U.S. Congress. Senate, Committee on Judiciary, Administration's Clipper Chip. For a somewhat different view, see Garfinkel, PGP, Pretty Good Privacy.
15 Provided the humans do choose to act as dampers, in the historical mold, and not as amplifiers of the trends as they have done in several previous market crashes.
16 The chaos literature has also grown to enormous proportions. Among the more directly relevant are Trippi, Chaos; Sherry, Technical Analysis; Peters, Chaos and Order; Chorafas, Chaos Theory. Good overviews may be found in Kauffman, At Home in the Universe; Waldrop, Complexity; Holden, Chaos.
17 Waldrop, "Black Monday."
18 Holusha, "Disruption."
19 For example, several of the authors in Lucas, Jr. and Schwartz, eds., Challenge of Information Technology.
20 Rosen, "Crashing in '87."
21 Harvey, Postmodernity; Jameson, Postmodernism.
22 OTA, Trading around the Clock, 32.
23 See, for example, Lamiell, "Global Stock Index."
24 Stoll, Silicon Snake Oil, 92ff.
25 OTA, Trading around the Clock.
26 Edwards, "The Crash."
27 OTA, Bulls and Bears, 57-58. The NYSE now requires program traders to cease entering orders into its electronic trading system when the Dow advances or declines more than fifty points; however, it does not prevent the traders from entering orders manually. By mid-1996, the circuit breaker had been triggered on downticks or (more rarely) upticks more than sixty times.
28 OTA, Trading Around the Clock, 73ff.
29 As Winner, "Artifacts," so lucidly points out, people continue to believe that they can control the things they have made.
30 Wilson, "Dead Hand."
31 Harvey, Postmodernity, 162-163.
32 Passell, "Fast Money."
33 Adam Smith, "Derivatives," WNET, July 21, 1995; "The Rocket Scientists," July 28, 1995.