Platt Perspective on Business and Technology

Online social networking and community when machines think – a case for a financial systems and investment instrument trading SCADA

Posted in business and convergent technologies, in the News, macroeconomics by Timothy Platt on May 10, 2010

In the third part to this series on intelligent infrastructure networks: Next Generation SCADA Systems as Paradigm for Next Generation Social Networks I presented a case for developing a next generation SCADA (Supervisory Control And Data Acquisition) system for more effectively connecting and coordinating next generation electrical power grids.

There are a variety of other network-demanding systems that would also fit this same paradigm and one of them, I argue here is our system of trading in financial instruments: stocks, bonds, mortgages, futures of all sorts, and increasingly including more complex and obscure instruments (obscure as to content and risk) such as derivatives.

On Thursday, May 6, 2010 a still jittery market fell into free-fall for a period of approximately 15 minutes when computerized trading systems fell out of synch and sellers could not be smoothly and immediately meshed with corresponding buyers. This set off automatic revaluation of these instruments in trade and certainly in US financial markets, and this lead to a cascade of reaction and counter-reaction and all of it facing downward as to valuation. The New York Stock Exchange, I will add, was not the only place where traders saw the floor drop out from beneath their feet when this happened. Any jolt of this scale to the financial system of any one country or region is sure to have ripple effects going way beyond its borders if nothing else and this event has not proven to be an exception to that.

And the context of this event, coming at a time when the overall financial systems marketplace is just coming back on its feet after our recent deep recession did not help. Much of that downturn happened because of a lack of transparency and awareness of risk for an increasingly large percentage of overall marketplace valuation in play. That percentage included subprime mortgages and other high risk investments that were all too often bundled into complex mixes of investment instruments (derivatives and their relatives) to create obscurity. These black-box financial entities were then rated as if safe and low-risk by rating agencies that were presumed to be making completely independent evaluations, based entirely upon detailed analysis of the contents of these complex investments. But it turned out they were neither fully independent of the businesses that packaged these complex investment options that they were rating nor were they fully aware themselves of what was in them or of the real risk to investors that was inherit in them.

When I first outlined how SCADA systems are set up and run I drew a distinction between them and Distributed Control Systems and I raise this distinction here too. Financial systems and our overall investments marketplace are comprised of complex hierarchies of ownership, oversight and management and any overarching response that would be developed to reduce the likelihood of overall systems breakdown in them would have to, in practice, focus on coordination and not on anything like centralized control, and even through a more centrally managed but distributed-for-local-detail command and control system. Overall coordination to prevent widespread systems failure such as we saw last Thursday, and longer term such as we have been going through the past several years now might be politically acceptable but anything smacking of overt detailed control and certainly from any big brother regulatory agency would not. And I doubt that type of system would even work effectively anyway. Governmental bureaucracies are not, after all, generally known for their insight, creativity or efficiency.

But I find myself coming back to the fundamental properties of automated trading systems such as we have now and I find myself thinking to the example of our current, vulnerable electrical power grid systems.

• Timing is of the essence in investment trading and large volumes of it are conducted on time scales for which even significant fractions of seconds are considered way too slow to be effective.
• Evidence, though preliminary strongly suggests that automatic trading slow-downs in our current patchwork quilt of automated trading systems, automatically triggered to try to correct the downward spiral just exacerbated it and accelerated the fall in apparent valuation across the marketplace.
• I noted in Part 3 of this series that “the more data is required at any given time for effective real-time coordination and management of a system and the shorter the time frames that real-time positive control has to be carried out in, the more automated the system has to be to work effectively.” I will add that the more this type of automation is needed, the more connected and wide-ranging it has to be, and the fewer the gaps it can work around with reliability.
• The financial systems we have in place and our overall investment instruments marketplace have come to operate on a progressively faster time-frame and with increasing volume and complexity of data and this can only be coordinated so as to limit likelihood and impact of breakdown by using effective automation, with human oversight – next generation SCADA systems that effectively span the entire marketplace and in real-time.
• This is going to require greater clarity and transparency into the individual investments in play and their actual contents and risk.
• This is going to have to include more effective rules-based monitoring and reporting, and auditing of overall performance.
• Ultimately, no single country or government, or national economy can make this happen. We are all too globally interconnected and interdependent for anything like that to have any real chance of working if handled entirely locally in any real sense.
• Coordination has to start with the local entity and the individual corporate entity offering investment options and instruments and go up from there – bottom up, but it also needs overall global marketplace, regulatory guidelines and coordinating guidance – top-down too.

The United States economy has presumably just passed through the worst of our recent and still current recession crisis for its economy but Greece to name one other country is still in crisis and that affects all of Europe and that affects the entire World. We are all interconnected and we have to find the collective will to find and create an effective overall solution to the vulnerabilities that our current uncoordinated quilt-work system shows.

I would argue that while automated systems have contributed to creating the problems we face, coupled with lack of transparency and consistency in the marketplace, effective and connected automation is going to be needed to fix these problems. And that simply brings up new potential problems. Any global financial system and investment marketplace it supports is going to have to be secure in the face of potential threat from terrorism and cyber-warfare – either of which can be state or stateless-sponsored. I will look into that set of issues in my next posting in this series.

3 Responses

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  1. information technology said, on May 11, 2010 at 3:34 am

    wow .. very nice your blog
    a lot of information I can from your blog

  2. […] to examine two specific test cases with a posting on next generation electrical power grids and a posting on financial instruments trading and exchanges. Both of these focused on SCADA (Supervisory Control And Data Acquisition) systems as a basic […]

  3. […] of a set of connected dumb networks such as we have with our current electrical power grids and our financial instruments trading systems – vulnerable to catastrophic […]

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