Will big data destroy the stock market?: Part 2

(Editor’s note: This is the second of two parts. Read Part 1.)

So what can be done to keep the destructive forces of our hacker culture at bay? Can the controllers and regulators ever outsmart the unleashers?

Reaching the Breaking Point – One Additional Scenario

People who are earning a living off the stock market have a vested interest in preserving it.

Even though the markets are being heavily abused by “the takers,” virtually all of the current players will go out of their way to keep the current system operational. No one wants to kill the goose that lays the golden eggs.

However, there are three key variables where complexity issues are spiraling out of control – volume, speed and scale. With the size and scale of the problem growing exponentially faster than the regulatory ability of those trying to keep the genie in the box, given enough time, I would place the odds of total collapse at 100 percent.

So what does failure mean, and exactly what will it look like?

Consider this scenario.

The first of those to master the big data stock market era will become the wealthiest people on the planet in a very short period of time, literally over night. Their rise to prominence will be silent and without fanfare.

This new class of the super elite will quickly move to shore up their power by demanding prominent board positions in some of the world’s top corporations, and in short order, start converting public companies to private ones as a way to insure ongoing control.

Once a few major companies have been privatized, others will begin to panic and begin similar steps to isolate themselves from the public markets.

In just a few months, we will see a massive migration towards privatization, with thousands of companies around the world seeking refuge from similar hijackings.

With huge numbers of businesses leaving the marketplace, this black swan event will cause an implosion of global stock exchanges.

So at what point do the existing stock exchanges begin to fail? To put it another way, at what point do the too-big-to-fail banks with all their hands in the cookie jars find it necessary to step in to try to regain control of a system that has gotten away from them?

The answer: When someone new comes along, a new breed of “big data super-quants,” that learns to play the game on a whole new level, leaving today’s existing power elite one step behind on the investing chessboard.

The initial battles will be over rule changes designed to keep “intruder techniques” at bay.

The system will be officially broken when people lose faith in its integrity. When the trust is gone, businesses will begin to abandon it.

So then what?

Given enough time, all industries will eventually end. When the stock market ends, how will it affect society?

The businesses that the market has been investing in will undoubtedly figure out other ways to compensate. The traders that made their living in the market will find themselves looking for new skills to do other work. And the news media that has dedicated unusual levels of attention to this high-end chess game will be forced to find real news to report on.

Final Thoughts

Admittedly, I’m not an expert on the stock market or the nuanced theories that govern the system. And I’m quite certain the scenarios above are overly simplistic and simply wrong.

But big data itself is a game changer, and once combined with the scaling of speed and volume, people heavily invested in today’s game will undoubtedly be blindsided by something new.

Much like adding steroids and performance enhancers to professional sports, the human vs. human marketplace for stocks is about to be overtaken by a wave of cyborg quants driving next generation supercomputers to play an entirely new game of Moneyball.

So how long before everything begins to unravel? I’m not sure of the year, but it will happen on the second Wednesday after a full moon. In fact, I’m so certain of it, that I’m willing to bet all my Wachovia, Blockbuster Video, Enron and Circuit City stock on it.

Categories: Economy/Politics, Finance