:: The Park Paradigm ::

Markets for the Digital Generation

One step closer to the PSC (personal super computer)?

This past winter Calvin College professor Joel Adams and then Calvin senior Tim Brom built Microwulf, a portable supercomputer with 26.25 gigaflops peak performance, that cost less than $2,500 to construct, becoming the most cost-efficient supercomputer anywhere that Adams knows of. “It’s small enough to check on an airplane or fit next to a desk,” said Brom. Instead of a bunch of researchers having to share a single Beowulf cluster supercomputer, now each researcher can have their own.

But what I really want to know is how long I have to wait for a MacBook Pro with 100+ qubits?

The heart of any quantum computer, whether it’s built on a sliver of semiconductor or not, is the qubit. A word about the qubit: it’s odd.

In an ordinary computer, information is stored as bits, usually a minuscule reservoir of charge or the charge’s absence in a memory cell’s capacitor. At any given instant, an ordinary binary digit can be in one and only one of two different states. But the value of a qubit is determined by the quantum states of individual particles. So, like those quantum states, a qubit can have the value 1, or 0, or it can be—in the paradoxical world of the quantum—both values at the same time. This versatility is central to the power of quantum computers. In an ordinary computer you can represent a number between 0 and 31 using five binary digits. But using the same number of qubits you could represent all 32 numbers at once and perform the same calculation on them simultaneously. And that’s not even the end of the weirdness: two or more qubits can be linked together in ways no two transistors could ever be, influencing each other instantaneously—even if they are separated by a distance of light-years.

Now I just need to figure out what the equivalent of ‘quantum entanglement’ for finance…do risk quarks have spin???

Update

(from the NY Times) Researchers at I.B.M. laboratories say they have made progress toward storing information and computing at the level of individual atoms.

The scientists documented their work in two papers appearing on Friday in the journal Science. Both papers are focused on new understanding of the behavior of magnetism at the tiny scale of nanotechnology, where scientists hope to develop electronics made from components that are far smaller than today’s transistors and wires.

In one paper the researchers describe a technique for reading and writing digital ones and zeroes onto a handful of atoms, or even individual atoms. The second paper describes the ability to use a single molecule as a switch, replicating the behavior of today’s transistors.

The papers are the latest indication that computing technology is beginning to emerge that could replace today’s microelectronics materials in the next decade.

Share This

I think I may have intially stumbled upon Tina Dico via iTunes ‘Free Single of the Week’, and call me a sucker for live and unplugged performances, but like last time for Kate, I highly recommend her Live iTunes session as a great starting point to discover this wonderful artist. Adding to her appeal (imo) is her independent route to success:

Or… you could do it Tina Dico’s way. That the 27-year-old has beaten Coldplay and U2 to Number One in her native Denmark is impressive. That she has won the Best Songwriter Grammy and been voted Best Composer at the Danish Music Critics Awards is no mean feat. But the fact she did all this by putting out her music herself – without recourse to the marketing muscles of A Big Record Company – makes her unique. In an age of gimmicks and payola, text-in talent contests and image-first/music-second rock posturing, Tina Dico did it the other way: on the strength of her songs.

“I guess it is quite unusual to start your own label when you’re 23 and release your own album in the States when you’re 27,” she says. “It goes to show you what you can achieve.”

My favorite song is “One”:

Tina Dico – One

unfortunately I couldn’t find a video to post, but “Break of Day” is another excellent track which you can listen to below:

She’s originally from Denmark which, like Canada, seems to produce a disproportionate number of talented musicians and artists - perhaps its the latitude and the proximity of a culturally dominating southern neighbor…

(I promise for the next Music of the Week to deviate from the pretty girl with an acoustic guitar meme. But I also promise to come back to it at some point!)

Share This

For readers who have yet to be seduced by the charms of Facebook, this Business 2.0 article and JP’s series of posts are good places to get a better understanding of the platform and what makes it interesting (for the over-30 crowd!)

Many, many column inches have been written of late on the subject of Facebook, to the point that people who haven’t taken the time to try it out and migrate some of their (real-world) social networks to the platform are understandably cynical and wonder how the site can possibly live up to the hype. I’m not suggesting that this suspicion is entirely misplaced but I would however suggest that the fundamental enthusiasm surrounding Facebook is based on the real value it provides as a medium through which you can easily organize your networks online.

So what’s the Park Paradigm angle? Well, I would say that it is the closest online simulation of a trading floor environment that I have ever come across. I’m not talking about the content - although if you put all the people on a given trading floor on Facebook, you’d have that too - no, I’m talking about the connectedness, the interactivity, the multi-threaded narratives, the buzz… It’s not easy to describe, but anyone who has spent anytime working on a trading floor would identify with the energy that is generated on a good* trading floor. (* Some trading floors don’t work. If you don’t get the balance, acoustics, spacing, etc. right you can end up with a glorified wired reading room…) This is the same energy that can be harvested, seemingly effortlessly, by building a network of friends and applications on Facebook. Of course this is potentially interesting and useful in thousands of different contexts but let’s come back to markets. And trading floors.

Anyone who has worked in capital markets is likely to be familiar with the ubiquitous Bloomberg terminal. And notwithstanding the myriad of excellent analytical and trading applications available on Bloomberg, the ‘killer app’ - the secret of Mike’s success - was Bloomberg’s private instant messaging. Yes: IM with credentials, with context. Yes, “chat” is the main reason why Mayor Bloomberg is one of the wealthiest men in the world. (Remember the rise of Bloomberg in the world’s trading floors was long before ICQ was dreamed up. And once they hit the tipping point, Metcalf’s Law just took over.) There is no irony intended. Getting this right - providing this service - was of huge importance and benefit to people and firms working in global capital markets. Why? For the same reason the first modern stock market emerged out of conversations between trusted acquaitances in the coffee houses of the City of London:(in the words of my friend Patrick, “the essence of markets like most essences of civilization centers upon community.” (from The Exchange Manifesto, page 12)

Indeed, a heretic might say that the investment bank of the 21st century, the capital markets of the digital generation might not be built on a Bloomberg platform but on a Facebook (or other yet to be invented?) platform. (A heretic. Not me.) The irony of a number of investment banks banning Facebook access from work is abundant. So how will Bloomberg and Facebook compare in 2015? Of course by then, Mike will be President, and Mark may be Mayor of New York. Stranger things have happened. And as for my friend Dave (pictured above), well maybe he’ll stick around and run FB while Mark runs Manhattan.

Share This

…to James Montier and his long-awaited entry into the blogosphere. James is a former colleague and is an expert in Behavioral Finance. Indeed his research notes were among the only consistent ‘must reads’ in the firehose of analyst notes I used to receive in my previous life. He has recently left Dresdner Kleinwort and while between jobs has decided to start blogging; one can only hope his future employers allow him continue and that he remains motivated to do so once back in the banking salt mines!

If you are interested in the subject, I can highly recommend his book “Behavioral Finance: Insights into Irrational Minds and Markets” (and I’m looking forward to his forthcoming “Behavioral Investing: A practitioners guide to applying behavioral finance”) - for anyone involved in investing whether it is managing their own savings or running a multi-billion euro fund, reading James is an investment that is well worth the time.

I suspect that if more traders and hedge fund managers had read James and taken on board his insights, there would have been far less hubris and perhaps far fewer distressed situations in the markets over the past month or so. Then again, that wouldn’t be nearly as interesting to watch…

(Thanks to Rowan for directing me to James’ new site.)

Share This

Well not exactly but pretty damn close: replace 23 red with frequency and intensity of storms hitting population centers in Florida and it is spot on. Only with 23 Red, at least the probability is easy to price.

Of course, ‘gambling’ is illegal in the Sunshine State
and if any resident wanted to offer or take odds on the likelyhood of a hurricane hitting their home town, of course they would be breaking the law. The irony of the state taking a giant punt with their taxpayer’s dollars is of course almost certainly lost on the state government…

One of the most significant business and economic opportunities that will arise out of the changing techno-economic paradigm over the coming ten to twenty years is the rethinking and transformation of the business of insurance. The rise and rise of the risk quark will inevitably reshape the landscape of risk transfer and mitigation. But it won’t be easy. Indeed their will be many backward steps along the way as the trinity of inertia, vested interests, and outdated regulatory frameworks conspire to perpetuate the current model despite it’s increasingly obvious failings.

How else to explain the recent de facto nationalization of property insurance in the State of Florida? (from The Economist:)

…insurance companies are shedding customers as fast as they can…

…The slack is being picked up by a fast-growing state-run company, Citizens Property Insurance. Citizens is acting as the insurer of last resort, underwritten by the Florida Hurrican Catastrophe Fund, a pool financed by the state. In January the state decided it could resolve the crisis by expanding Citizens and making it more competitive with private companies. It is now by far the state’s largest home-insurance provider, with 1.3m clients.

…And by allowing Citizens to grow so big, in the eyes of many agents, the state is exposing itself to tremendous financial risk in the event of a large-scale disaster. Unlike private companies, which can seek reinsurance on the global market where risk is less concentrated, the state would have to go to its own taxpayers if a huge storm struck.

Now whether or not the state should bear the risk of weather-related property damage is in my opinion a political debate. What I find appalling is not that a democratically elected government decides (or not) to underwrite this risk, but that they do so in a completely reckless, opaque and market-distorting way. By not allowing the market to work - by pricing risk appropriately based on the market-determined probabilities of certain outcomes - the result is that the economy cannot optimally allocate resources and that the true cost of any subsidy is at once much higher (than it would otherwise be) and completely opaque. Furthermore it is unaccounted for: I doubt that the Florida government accounts reflect the enormous contigent liability they have committed their citizens to.

Just as physicists and chemists have conservation of mass and energy, so to are risk quarks ‘conserved’. Risk transfer and optimization is highly useful and increases overall wealth and utility in an economic system. But risks - like mass and energy - must be conserved. Call it the 1st Law of Financial Dynamics. (Park’s Law? anyone? anyone? … ) One of the fundamental problems of the current risk management paradigm, is that it encourages - often with regulatory and governmental connivance - the dissimulation of ‘inconvenient’ high energy risk quarks.

What do I mean by ‘inconvenient’ risk quarks? These are the elements of risk in any system that when ‘removed’, allow all (or at least all incumbent) constituencies to have only positive outcomes. My contention is that risk is conserved so these elements are never truly removed, but only hidden from view. Worse, frequently the financial physics of segregating and obscuring these elements most often leads to an expensive and suboptimal distribution of risk throughout the system. Indeed -whilst I don’t know whether he would agree with any of my analysis - I believe that Warren Buffet’s view of (financial) derivatives as weapons of mass destruction, is credible only in the context of their (derivatives) bastardized deployment within a system that does not want or allow them to exist unfettered or transparently. The existing industry and governmental complex is applying the rules of classical finance to a new quantum world. With alarming consequences.

And don’t even get me started on sub-prime… (Remember always that gambling is illegal in the US. Well…only as long as it is done in a transparent and robust fashion. Embed it, hidden, within the existing fabric of business and of course it’s ok. Messy yes. But not threatening to the existing socio-institutional paradigm.)

Share This

Given that it is probably my favorite newspaper, I was pleased to see that the Economist had woken up to my Digital Generation and financial services meme with a short article in a recent edition:

Now the younger baby-boomer’s children are moving into adulthood. This group labelled Generation Y, is smaller still. They may look like distant prospects, but much of the financial sectors future success will ride on how soon (and how profitably) it grabs them when they reach their 20s.

What characterizes Generation Y? Comfortable with technology, individualistic and fond of networking, the young should be open to attractive offers in personal finance. But so far few financial firms have bothered with them.

(I must say the language “how soon…it grabs them” betrays a lack of understanding of how businesses will need to engage with these new digital natives if they are to build successful and profitable relationships with them.)

Indeed, I gave a presentation in June to a group of senior executives of a large global financial services firm focusing on how generational change was likely to affect their business over the coming decade or two, and how the cultural and behavioral norms of the (mostly) baby-boomer senior management were increasingly likely to lead to missed opportunities and ultimately vulnerability to disruptive newcomers if they failed to adapt to the emerging digital culture of their customers and employees.

I obviously think there is enormous potential in building new business models adapted to these new cultural norms and taking advantage of a new techno-economic paradigm and it is something I intend to focus on in the next few years. Watch this space.

Share This

As reported in the NY Daily News:

Tennis is one of the fastest growing areas of Betfair’s sprawling business, which encompasses some five million bets a day. In July, for instance, the London Stock Exchange handled 12 million transactions; the same month Betfair handled 75 million. A record $60 million was wagered on this year’s Wimbledon final between Roger Federer and Rafael Nadal, according to Marks.

Share This

Interesting article from the LA Times, describing the behind-the-scenes action at Betfair with respect to the recent suspicious Davydenko tennis match:

In the room, it turns out, toil 40 people with 40 unusual jobs. They’re the “fraud team” and the “integrity team” of the Internet gambling colossus Betfair, which handles more daily trades than the New York Stock Exchange. Barton-Nicol heads the Risk Investigations department, and the specialists who undergo three months of training and spend eight-hour shifts scrutinizing wagering patterns had detected something with Davydenko-Arguello that qualified as, to use a popular British word, dodgy.

Would be interesting to compare Betfair’s approach and resources with those of the SEC or FSA in terms of insider trading enforcement.

Share This

Inspired by Marc Andreessen and my excitement in discovering the brilliant Rodrigo y Gabriela (their cover of Metallica’s ‘One’ on this album is amazing) via his blog, indeed I went right out and bought their Live in Manchester album on iTunes. (It’s really too bad that iTunes doesn’t facilitate linking to artists and albums…)

Now if you are interested in my somewhat eclectic (a polite way of saying strange) taste in music, you could always listen to my last.fm radio station (available from my sidebar) which not only plays music in my library but also music it thinks I would like (and I must say it is amazingly prescient.) However, since this is probably a bit much for most (all!) of you, I thought I’d try to identify artists or albums in my collection that I think are particularly good and perhaps not so well known.

With this in mind, there was an obvious first artist; Kate Walsh is an incredibly talented young singer songwriter who has a unique and mesmerizing voice:

Kate Walsh is a British singer/songwriter from Burnham-On-Crouch, Essex, a small fishing village. Her music is characterized by her beautiful voice and life caressing vocals. She is an artist who takes you away from the rush and madness of the world. Her music has a timeless quality, making it hard to believe she was only 20 when she released her first album (she was 23 when her second album, Tim’s House, was released).

Kate is an example of an artist who skipped the traditional label publicity machine,and rose to popularity on iTunes. Her self-made album, “Tim’s House” rose to #1 on the UK iTunes store. Her Myspace page, however, claims that she owns no ipod or walkman.

She includes Longpigs, Joni Mitchell, Tori Amos, Rufus Wainwright, The Shins, Talk Talk, The Velvet Underground, Pink Floyd, Red House Painters, Magnet, Sarah Vaughan, Dinah Washington, and Sufjan Stevens among her influences.

I first heard her at TED Global in Oxford in the summer of 2005 and I immediately bought her first album. But if you want a place to start I highly recommend her ‘Live in London’ performance on iTunes, which was recorded earlier on the same night she played this gig (which I was fortunate enough to attend) at the Water Rats Theater in London in May(this video is from a gig she played there in December 2006):

If you could buy shares in an artist, I would be getting very long Kate. Enjoy.

Share This

This recent article in the Guardian got me thinking about how much I don’t like markets where hardware is subsidized by long-term, locked-in service contracts. The most ubiquitous of these are those for mobile telephony, cable/satellite television and (to a lesser extent as the necessary hardware is cheaper…) broadband internet access. Now it looks to be coming to power markets with the introduction of ‘smart metering‘:

Householders switching power companies face having to sign broadband-style contracts from today after the energy regulator told the power companies they can now force customers to sign long-term agreements.

Ofgem yesterday said it was removing the rule that ties a customer to an energy supplier for just four weeks. Industry observers immediately expressed concern the move will allow the big six companies to impose year-long minimum contracts and financial penalties for getting out early - typical conditions that apply in the mobile phone and broadband markets.

Ofgem said it had removed the restriction to encourage the power firms to introduce energy efficiency measures and smart meters in their customers’ homes. So far, the power firms have been reluctant to install energy-efficient boilers or loft insulation because there was nothing to stop the customer switching to a rival after the work was carried out.

The scrapping of the 28-day rule will allow companies to make such improvements, Ofgem said. In return firms will be able to demand the customer signs a long-term supplier deal. “We see this as a very positive thing for consumers,” said an Ofgem spokesman. “We consulted widely on this issue and all the interested parties have agreed that its removal will stimulate future investment in energy efficiency measures.”

I understand why this kind of pricing policy is so seductive to most consumers - it is a variation of the classic installment plan and basically exploits the fact that the vast majority of people either don’t understand or fail to apply the principals of net present value in assessing the cost of the goods and services they purchase. (The same lack of financial literacy drives many to borrow long term on credit cards at close to 20+%, when even the weakest could probably borrow at unsecured rates of 10-12% through specialist non-prime providers.) It’s not a question of cash flow - although I suppose many would use this as an argument (in favour of subsidized hardware) along the lines of: “yes I know the long term costs will be higher but I just can’t afford £300 up front for a phone/cable box/smart meter/etc.” Well, yes that is certainly true but you would be better off borrowing the £300 to finance your capital investment, as the implicit financing costs built in to the ‘lock-in’ model are probably north of 30%(!) I think the problem is that most people don’t think of these purchases as capital investment, not that (they think) this type of purchase financing is the optimal structure. If it were or deemed so, we’d see cars given away by BP in exchange for a long term commitment to buy petrol (gasoline) from BP at above market rates. Or maybe they could team up with Norwich Union and offer a package…

I would like to see (especially in regulated markets where there is particular risks of collusion and/or significant barriers to new entrants - ie telecoms, energy, satellite tv, etc.) providers be required to offer unbundled packages and/or where relevant unlocked hardware. Let the customer decide. It may well be that consumer ignorance or apathy would mean that there would be few takers but at the very least it would drive further transparency into the embedded (and I suspect) usurious financing costs embedded in the bundled offerings. More importantly, it would allow a true decoupling of the pricing of distribution from the price of the underlying commodity, allowing the retail customer to manage these price risks separately and professionally, aided almost certainly by intelligent and automated agents.

Indeed, over the past year or so I have been educating myself as to the somewhat arcane issues involved in creating intelligent, real-time electricity markets (via the use of intelligent meters, real-time pricing and load management) as I see the modernization of this enormous risk market as a fascinating laboratory - for technology, business models and risk quarks - with the potential (along with financial services) to drive a paradigm shift from centralized, institutional, standardized risk management to distributed, individual and customized. (For those of you interested, I have found the Utilipoint briefings - which you can subscribe to online - very informative.) I’m pretty sure however this transformation will be somewhat long and painful as you have the all to familiar issues of turkeys-not-voting-for-Christmas coupled with various shades of regulatory capture and, at least for now, a relatively docile and uninterested population of consumers. Here is somewhere where ambitious regulators and legislators could really help in getting the ball rolling, something they don’t yet seem inclined to do.

Share This