:: The Park Paradigm ::

Markets for the Digital Generation

I’m sure there is a sense of relief today in the City - in a “buy-the-rumour-sell-the-fact” kind of way as the long and tortuous road to MiFID (the Markets in Financial Instruments Directive) has finally arrived at its long awaited (and feared destination.) While it is far from likely we have seen anything more than the “end-of-the-beginning” as to how this will impact market structure and the financial services industry, there is likely to be a collective pause for breath as the initial finishing line has now been crossed. The Economist flagged this week that:

…For all this, big banks are unenthusiastic. Their churlishness about MiFID is not only because of the costs, but also because of the transparency it entails. The anonymity that came with dealing off-exchange meant that pricing became part of a bank’s intellectual property…

Now I’ve been shouting from the rooftops for several years now that increased transparency (in financial markets) was as inevitable as the sun rising in the east; driven by the information and communication technology revolution, the ubiquity of (freely) available information was only going to increase and exponentially so and any efforts to reverse or slow this trend would ultimately end in abject failure. I still believe this to be true - although I am not so naive to think that powerful market participants and/or regulators cannot influence the ‘local’ speed of this transformation. However cynical it may be, I also understand that (resistance to increased transparency) may indeed be in the short term interests of these players but ONLY if this is pursued as a stalling tactic to better prepare and adapt to the inevitable disruptive paradigm shift. In my opinion however this is not at all the sentiment that has prevailed in most executive committees of large sell-side institutions; the strategy has seemed to verge more on the let’s-hold-on-for-as-long-as-we-can (and implicitly…let-my-successor-deal-with-the-fallout…) In this context, I think the big banks should be quietly thanking the Commission and Mr McCreevy for giving them an excuse to start making the changes they would have needed to make anyways, before they were completely exposed to disruptive new entrants with business models perfectly aligned to the new techo-economic paradigm. Any business model who’s foundation is built on the premise of information scarcity will not live to see the middle of this century.

I can only applaud (while noting the irony) of the Damascene Conversion that this summer’s market turbulence seems to have sparked in some of the world’s top investment bankers. While I like to poke fun at the sometimes pre-Cambrian behavior of investment bankers, I also know it is unwise to sell them short and have always been impressed by their shameless pragmatism (which - in case it’s not clear - is ultimately a wonderful survival gene and something to be admired.)

Share This

Thanks to Boing Boing for the pointer to this article on using game theory and mathematical models to predict event outcomes:

Predicting the future is not very hard, according to Bruce Bueno de Mesquita: a little mathematics is all you need. Figuring out how to manipulate a situation to achieve specific aims is a bit less straightforward, but Bueno de Mesquita says his mathematical tools can usually do that, too.

The New York University political science professor has developed a computerized game theory model that predicts the future of many business and political negotiations and also figures out ways to influence the outcome. Two independent evaluations, one by academics and one by the U.S. Central Intelligence Agency, have both shown that about 90 percent of his predictions have been accurate. Most recently, he has used his mathematical tools to offer approaches for handling the growing nuclear crisis with Iran.

Bueno de Mesquita provides the computer tools, but he relies on political or business experts to identify specific issues, their possible outcomes, and the key players. He asks experts narrow, carefully delineated questions about which outcome each player would prefer, how important the issue is to each player, and how much influence each player can exert. But he does not ask about the history of the conflict, the cultural norms of the area, or what the experts think will happen.

Another example of the emerging potential of algorithmic business strategies? Come by next Tuesday at 5pm at Web 2.0 Expo in Berlin if you are interested in hearing more!

Share This