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20 April 2016

Access and Information



These days, even people who in the past used to think they understood what was happening in the market are frequently baffled by unexpected bits of business popping up, seemingly from nowhere. Take nickel, in recent times. Large volumes of sell orders have appeared above the market on the Select platform, and sat there. On several occasions, as the price has moved up, the expected did not happen. The orders were not pulled before they could be traded; rather, they stayed there and were taken out by the rising tide of the market. The general consensus seems to be that they originated in China, and they could have been arbitrage related, NPI-hedging, options-based or simply an unsophisticated investor playing the market. I’m not going to try and guess, but the point I find interesting is that I have not found anybody who would speculate any more than by throwing out a few possible ideas - like the ones I’ve just listed - of what the source may be. Now, traditionally, pretty much everyone had a definite opinion about the whys and wherefores of things like this. It was almost as though you couldn’t be a serious player unless you (at least apparently) were on top of where business was coming from and what it represented. It was a matter of professional pride for the brokers to be able to assert authoritatively that they knew what was going on. (Incidentally, I always wondered about this: frankly, it seemed to me that an honest “I have no clue” shouldn’t have been seen as a a black mark. But it was.)

What’s brought about this change in attitude is the rise of - specifically - electronic trading, and - more generally - the internet, since that is what facilitates the electronics. Now, I’m not going to complain about electronic trading - it’s here, and it’s not going away - even if I do feel in some ways it’s not being handled as well as perhaps it could be. What is happening, though, is a kind of democratisation of the market. No longer is there so clearly an inner circle with better (or at least easier) access to information which gives them a position of greater influence. The reality today is that information is indiscriminately available, which theoretically levels the playing field. So whereas in a previous generation, knowledge of, to use a hackneyed example, earthquake damage to mines would have trickled down, putting a premium on local representation, say, now the dissemination of that same information is on a blanket basis, via social media and more rapid transmission by professional news gathering organisations. That is, I think, reasonably described as a democratisation, as it levels the space between the (previously) knowledgeable elite and the greater number of those without privileged access. 

The other side of that, though, is that it debases the value of information. In other words, if everybody - the whole market - is aware of something, then, obviously, there is no advantage to be gained. The playing field is beautifully flat, and, incidentally, the regulators have a smile on their faces. Add to that the possibility of anonymity granted by the internet, and that brings us back to my original point about the unexpected being more difficult to explain.

At the same time as this explosion of information, direct access to markets has never been easier. That poses again problems for the ‘insiders’ (not meant in a bad sense), because it represents a further erosion of their privileged position. Look at it this way. The physical trader has a concrete offering for the customer: the broker doesn’t. What the broker has to sell is access and information, and if those two are made easier, he probably needs to develop a modified role.

This is only a short article, a brief look at how instant information and quasi-universal access can change market behaviour. The next, related, subject to look at, which we will do in the reasonably near future, is how ever-growing computer power and, particularly, the way artificial intelligence is developing may have the ability to take that change a long way further. Speed of processing information could be the new arbiter, where simple access was in the past. It's a fascinating subject, which will need much deeper consideration.

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