The finance industry is in a race against science being waged with transatlantic cables and ever-tinier chips. A new paper authored by a team of physicists, engineers and industry data experts explores what Physics of Finance blogger Mark Buchanan calls the “approaching singularity.” Improvements in the technology behind high-speed trades is being measured in increments of “sub-seconds” and approaching the physical barrier of the speed of light which will, as the paper puts it, culminate in an “all-machine phase characterized by frequent black swan events with ultrafast durations.” Or, in Mr. Buchanan’s words, “likely lead to disaster.”
The superhuman speed of these trades make it tougher to predict major financial crises, the paper says, citing the recent “flash crash” phenomenon. ”In traditional human-machine systems, real-time human intervention may be possible if the undesired changes occur within typical human reaction times,” the authors note.
Even if one sets aside the time taken for humans to physically react, it takes a chess grandmaster approximately 650 milliseconds just to realize that she is in trouble (i.e. her king is in checkmate). In many areas of human activity, the quickest that someone can notice such a cue and physically react, is approximately 1000 milliseconds (1 second).
Notwithstanding this biophysical limitation, the strategic advantage to a financial company of having a faster system than its competitors is currently driving a billion-dollar technological arms race to reduce communication and computational operating times down toward the physical limits of the speed of light – orders of magnitude below human response times. For example, a new dedicated transatlantic cable22is being built just to shave 5 milliseconds off transatlantic communication times between US and UK traders, while a new purpose-built chip iX-eCute is being launched which prepares trades in 740 nanoseconds (1 nanosecond is 10-9 seconds)
This is a really dense paper, but here’s what we got: machines are moving big chunks of money around faster than our eyes can blink or our tiny brains can comprehend, with the potential to cause crashes that are so lightening-quick they can neither be anticipated nor corrected before causing systemic trauma (because traders are still really fast at panicking). Thanks, science.