Pandora’s Black Box

Sat, Sep 1, 2012 - 1:13am
After the 2010 flash crash, ongoing market disruptions, and machines now being able to trade 1500 times faster than humans can blink, the issue of market instability posed by machine intelligence is now considered a matter of national security. In order to combat this new threat, the government has teamed up with private financial firms to open Pandora's Box and build a regulatory superweapon.

Black box: Any complex piece of equipment, typically a unit in an electronic system, with contents that are mysterious to the user.

Pandora's box: A process that generates many complicated problems as the result of unwise interference in something.

My first car was a 1965 Chevy Malibu. Like many cars built at the time, it was a simple and straightforward design at every scale. You didn’t need a degree in electrical engineering, computer science, or be a mechanic to understand all the details of such a beautiful machine. Then again, like that car, society was once largely dependent on mechanical systems that could be explained, taken apart, fixed, and put back together again.

Today, my neighbor complains that he doesn’t understand new cars. Being that he’s a mechanic, that’s a problem. Unlike my ‘65 Malibu, many cars on the road today are more electronic than they are mechanical. My neighbor doesn’t understand the modern vehicle because, like 99% of us, he can’t take it apart and put it back together again without destroying the thing. Why is that? The reason, of course, is that technology has evolved from separate mechanical subsystems—like our muscles and limbs—to highly integrated electronic networks—like the human brain. Thus, when he or I open up the hood of my new car today what do we see? Nothing but a nicely shaped black box.

Last Friday I posted a video titled, “Money, Power, and Wall Street,” where Cathy O’Neil, a data scientist, PhD math wonk, and once successful “quant” for D.E. Shaw commented,

Nobody knows how the system works. Even the people within finance don’t understand the system. They understand their little corner of the system, but very few people would come forward and say, “I am an expert on the financial system. I know how everything works.” ...The system is a huge black box.

This “black boxness” of the financial system is one that I find particularly intriguing, not because it is merely complex or mysterious, but because finance provides a glimpse into where advanced technology and society intersect.

When we think about the future of society and the world at large, it is not uncommon that we point at both the state of our financial markets and the finances of various States to get an idea of where things are headed. Of course, given the current enormity of State debts and the dizzying complexity of the financial system, many fear this portends a future collapse.

We can try to gain some perspective on our future trajectory by looking at historical examples of nations or empires that went through various forms of decline or disintegration, however, what separates them from us is the exponential increase in size and interconnectedness of the entire world.

This is something we can say, definitively, has never been experienced before at such a level.

Though we could spend some time on the population part of the equation, it is the way in which we are interconnected that I believe gives us a rather unique view into where the world is headed.

The financial system, the power grid, the internet—many of the things with which our society today is highly dependent—are naturally evolving to resemble complex biological networks. The human brain is, of course, the most common metaphor we use to describe the neural networking like structure of these systems, as seen in this partial map of the internet.

Also, the financial system reflects how the most advanced technology available is applied on a wide-scale for capturing societal trends. Thus, it provides a very interesting window of where public and private capital is being deployed in anticipation and reinforcement of existing trends that are likely to persist into the future.

The greatest of these developments currently, which has now become a multi-billion dollar industry, is a subject that I write about quite often: high frequency trading—specifically, the use of highly sophisticated automated software housed in large supercomputers, i.e. “black boxes”, that capture the mathematical murmurations of financial assets around the globe.

Keep in mind, these systems have become so rapidly advanced in speed and intelligence—in terms of the amount of data points simultaneously analyzed for each trading decision—that, as I have stated many a time, there is simply no way humans, in general, can compete. It is for this reason that I truly believe we are in the beginning stages of a massive shift tipping the scales in favor of machine intelligence. As I have written before, there are multiple reasons why this trend—or revolution—will most likely lead to market-wide dominance.

The takeover of the financial system by our silicon-based counterparts was not something that happened yesterday and there are many factors that have brought us to our current state. We can blame regulators for not “keeping things under control” but, as always, technology will innovate the path ahead. Like the map of the internet shown above, the complex interconnectivity and advancement of machine intelligence is one that reflects a broad and inescapable trend that may be slowed but not prevented.

In 2008, I claimed the next step of this evolutionary process would lie in the realization and response to losing control of the markets. After the 2010 flash crash, ongoing market disruptions, and machines now being able to trade 1500 times faster than humans can blink, the issue of market instability posed by machine intelligence is now considered a threat to national security. However, rather than simply roll-over and allow the system to become completely overrun, the next phase is to build a supercomputer to regulate the markets for us—a deus ex machina to govern the economic affairs of humanity.

Four years ago, that sounded far-fetched. Today, it is the expressed goal of the DOE’s Center for Innovative Financial Technology at Lawrence Berkeley National Laboratory—a place known for holding the second most powerful supercomputer in the U.S., the discovery of dark energy, and its key role on the Manhattan Project. What does all this have to do with regulating the markets? Like the race to build man's greatest weapon—the atomic bomb—it is now a matter of national security.

"Security and stability of markets is a national security issue of the first order. This has been made clear by recent events on both macro and micro time scales. We hope this center will stimulate discussion of these topics, and lead to a larger role for advanced computing researchers in understanding markets that have become advanced computers," — David Leinweber, Co-founder of the Berkeley Lab's Center for Innovative Financial Technology. (emphasis mine)


A.I.: The New God of Economics, Banking, and Finance

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