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20 August 2014

"Like the Fix, but with an Algorithm as Chairman"



“It’s similar to the Fix, but with an algorithm in place of the Chairman.” 

“It’s another sign of the dehumanisation of financial markets.”

Those are two direct quotes from some of the press coverage of the brave new world of the silver fix - sorry, the London Silver Fix has now become the LBMA Silver Price, because of course we all know what ‘Fix’ means, don’t we? Now, I don’t think anybody would be arguing with the proposition that once Deutsche announced its intention to pull out of the price-setting without having been able to find a buyer for its seat, it became inevitable that the mechanism for arriving at the daily price would have to change. It’s pretty clear to anybody with any sort of market experience that two participants in a (virtually) closed environment would not be able to produce a robustly defendable price; there would always be doubts about its authenticity. Equally, it was hardly a surprise when the decision was made to go with an electronic solution; that’s pretty much the default choice in financial markets, these days.

Welcome or Regret?

But those two quotes are interesting. First, I have to say that from the context it was not apparent whether or not the journalists who wrote them were welcoming or regretting the change: I think it’s probably the former, but it’s not obvious. However, it is actually quite a moment when we are effectively saying that we prefer the robot or the algorithm above human input. Over the last few months, I’ve recommended two books that treat the subject of algorithmic trading - one fiction (‘The Fear Index’, by Robert Harris) and one fact (‘Flash Boys’, by Michael Lewis); neither of the scenarios painted in those books conforms exactly to the price-setting environment, but they do provoke a bit of thought in that context.

Gaming the System

I’ve not been a silver trader, so I can’t speak from direct experience of what actually went on in the closed room or on the closed phone call, and maybe it was as rigged as some would suggest; I doubt it, but I can’t really comment any further than that. Both of the books I’ve mentioned suggest irregularities caused directly by the influence of algorithms. Now, I’m not a techie expert, but surely I’m not the only one who can envisage a participant (on the first day, there were only three, but as registrations are processed that number should grow substantially in the weeks to come) programming his own algo  to game the system? I fear we’re going to be looking at those annoying unintended consequences rearing their heads again.

Human Involvement

Before I’m condemned as being old-fashioned and ignorant of modern practices, let me just say that an electronic solution (once an LME Ring or similar was ruled out) is the only logical way forward; but I would prefer to see some human involvement maintained. I don’t think “the dehumanisation of the financial markets” is actually something to be aiming at. By all means use the technology that is available, but let’s not give it all to the robots just yet. It will be very interesting to see what route is chosen for gold and the pgms. And, indeed, when we finally get around to recognising that not everything bankers do, all the time, is always dubious. Sometimes, they just do their jobs, and a ‘Fix’ is not by definition a fix. 

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