The infinite size of an infinitely sliced fish

Port Nolloth’s heyday as a hub for the transhipment of diamonds and copper is long over.  Nowadays the small town near Springbok supports a little bit of tourism, and a small fishing community.

A fisherman who wishes to sell his catch for higher prices faces an eight-hour drive down to Cape Town.  Perhaps he pulls out his mobile phone and calls ahead to find out the latest price.  As refrigerated trucks converge on the Mother City, news of the imminent arrival of piscine abundance reaches the various seafood markets.  With so much soon to be available, the price for fish drops.

Our Port Nolloth fisherman could decide to take his catch elsewhere but what can he do to ensure that he spends more time fishing and less time driving?

Imagine that five metres outside Port Nolloth someone offers to buy all the fisherman’s catch for more than he could get in Port Nolloth but for less than the fisherman would get in Cape Town.  Imagine that 500 metres down the road someone else offers to buy that same catch, again for a little more but less than the final price.

That’s sort of how modern financial markets grapple with trade.  However, as should be obvious, this is all rather labour intensive.  Not for nothing is the image of a trading floor at a stock exchange one of hundreds of people all screaming at the top of their lungs amidst an explosion of paper and gesticulations.

Financial markets, by reducing the period that any one person has to own a tradable good, increase the fluidity of transactions.  This fluidity increases the knowledge that all producers and purchasers have about product availability and the prices for those goods.  A fisherman can, from her boat, know exactly the value of her catch as she pulls it in.  She can decide whether to stay out a little longer, or head in a little earlier.

Of course, this isn’t only about fish.  It is about absolutely anything that people want and are willing to pay for.  It also means that a small amount of production can result in a large amount of employment as all the various intermediaries and specialists haggle in a massed market to figure out where things should go and at what price.

So far so chaotic.

A human trader looks at a good’s historic price record, then does a whole bunch of reading of analysis reports and demographic and economic statistics to calculate what the future demand is likely to be.  Then they make a price offer.

This process takes time and might mean they miss opportunities that come and go in an instant.

Some traders have created computer programs that “read” a continual stream of news and divine prices based on algorithms.  Computers then buy and sell in fractions of a second.  As if our fish were being traded in fractions of a millimetre all along the highway to Cape Town.

These high-frequency trades are becoming an ever-larger component of international trading volumes.  There is a concern that these computer algorithms are only as good as the assumptions that go into them.  Too many of the programs use the same assumptions and so – far from reducing market instability – these programs might all behave in the same way at the same time and so magnify good and bad news to create ever-bigger peaks and troughs.

With time these systems will certainly improve but it is a little nerve-wracking to have to go through the technology’s adolescent struggles.  That said, consider how - in slicing financial transactions into ever-thinner portions - finance has created almost limitless opportunities, innovation and jobs.

And consider further that anyone who would regulate this industry must be as sensitive to it as is a fisherman to his catch, lest a resource that has the potential to feed everyone be depleted.