Readers of this blog have confessed concern over my focus on computers that are faster and faster (http://seekingalpha.com/article/223127-the-new-world-order-smaller-and-faster) and the blue-sky idea of quantum computers. I stand by this interest.
I focus on these developments because finance and the future of banking are going to be significantly impacted by faster computers, their greater capacity to store data, and to the ubiquitous presence of these things in our lives.
So we read: “A new photonic chip that works on light rather than electricity has been built by an international research team, paving the way for the production of ultra-fast quantum computers with capabilities far beyond today’s devices.” (See “Computers Set for Quantum Leap” in the Financial Times: http://www.ft.com/cms/s/0/8c0a68b0-c1bc-11df-9d90-00144feab49a.html.) The technical results of this research are being published today in the journal Science.
Many people in the field felt that it might be 25 years before we saw a functional quantum computer.
“We can say with real confidence that using our new technique, a quantum computer could, within five years, be performing calculations that are outside the capabilities of conventional computers,” claims Jeremy O’Brien, director of the England’s Centre for Quantum Photonics, who led the project.
Quantum computers are going to happen. Governments cannot afford to miss out being a part of the quantum revolution in computers. Governments must have quantum computers to keep secrets. Governments must also have quantum computers for defense purposes…a country like the United States cannot afford to be second in this field.
Therefore, “Hundreds of millions of dollars” are being spent “in the field.”
Why is this so important in finance?
Finance is information!
To see that this is so take a look at the book “The Quants” (I reviewed this earlier for Seeking Alpha: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.) In this book we see how closely the fields of quantitative finance and financial engineering have always been to information science and information theory. For example (I quote from my book review):
“It is interesting to me that the beginning of the story Patterson (the author of ‘The Quants’) tells is how math/physics whiz Ed Thorp, the Godfather of the Quants, started out on the path to ‘Quant-dom.’ Thorp, as a new member of the MIT staff, took some of his early work on how to predict outcomes of roulette wheels to a well-known member of the MIT faculty named Claude Shannon.
Shannon is known as one of the founding fathers of Information Theory, a theory that has to do with the transmittal of information and the ability to receive and discern the message conveyed in the information transmitted.”
Furthermore, “Now let me fast forward to the quant fund group known as Renaissance Technologies and its star fund Medallion. This whole group was created by Jim Simons and it is ‘the most successful hedge fund in history.’
What kind of team did Simons pull together to staff his funds? Cryptographers and people trained in speech recognition; in essence, people trained in Information Theory. They were trained to detect hidden messages in seemingly random strings of code.”
The development of computer technology and data storage in the 1950s resulted in the massive change that took place in the field of finance in the 1960s. Given the availability and greater accessibility of data related to the stock market, researchers on university campuses produced dissertation after dissertation on performance in the stock market.,
The field of finance has never been the same.
The power of quantum computers is hard to imagine. These computers will be able to make calculations that are only dreamed about in “far out” science fiction novels. These computers will be able to access data bases containing information from almost unlimited sources. The possibilities are mind-boggling.
Will these computers be used in finance?
If there is a chance to “make-a-buck” or several billion bucks, they will be used. Finance is always looking for an edge. Faster and more powerful computers are always a potential source for finding an edge.
But, back to one of my fundamental predictions: finance and financial institutions over the next five to ten years will be something substantially different from what we know now. What happened to finance and financial institutions over the past fifty years is only a prelude to what is going to take place.
Showing posts with label financial engineering. Show all posts
Showing posts with label financial engineering. Show all posts
Friday, September 17, 2010
Tuesday, August 31, 2010
The World Continues to Move to Smaller and Faster
Given all the headlines about double-dip recessions, consumer and business de-leveraging, and unemployment it is good to get back to some basic trends that, in my mind, are not going to change.
On the front page of the New York Times we read “Advances Offer Path to Shrink Computer Chips Again” (http://www.nytimes.com/2010/08/31/science/31compute.html?ref=todayspaper). “Scientists at Rice University and Hewlett-Packard are reporting this week that they can overcome a fundamental barrier to the continued rapid miniaturization of computer memory that has been the basis for the consumer electronics revolution.” And to the revolution in the waging of war and keeping of secrets, on advances in finance and business technology and so on and so on.
The problem had been that “the limits of physics and finance faced by chip makers had loomed so large that experts feared a slowdown in the pace of miniaturization that would act like a brake on the ability to pack ever more power into ever smaller devices…”
The new method, discovered at Rice University “involves filaments as thin as five nanometers in width…”
“Separately, H. P. is to announce on Tuesday that it will enter into a commercial partnership with a major semiconductor company to produce a related technology that also has the potential of pushing computer data storage to astronomical densities in the next decade.”
These discoveries, if they prove successful, will help to maintain Moore’s Law, the idea that industry can roughly double the computing power of chips every 18 months, and the Storage Law, the idea that industry can roughly double the amount of data that can be stored every two years. These capabilities have been the back-bone of computing power for the past fifty years or so.
Trends like these are going to continue because there is too much to be lost if they do not. For one, governments cannot allow their countries to fall behind in the development of computing power. There are two reasons for this: first, governments need to keep secrets and so must be able to keep others from breaking codes; second, powerful governments must continue to be able to kill people better than other governments in order to maintain their position in the world. Thus the United States government must continue to finance the development of these capabilities. This is why one can continue to expect the development of a fully operational quantum computer in the next decade.
As with the Eniac computer that was developed in the 1940s to improve the accuracy of firing
shells into the enemy, military needs come first, business benefits follow.
It is my belief in the continuation of such trends that lead me to suggest such things as the ineffectiveness of the newly minted financial regulations even before they become operational. Finance is information. This became apparent in the 1960s when the new computer technology produced faster and faster computers and also produced computers that had the ability to store massive amounts of data from the stock markets. This led to a new industry…quantitative finance. The boom in finance Ph. D.’s got its start with the portfolio theory and CAP-M models developed in these years as it became evident that lots and lots of dissertations could be written given all the data that were now available to researchers.
This industry only grew as computers got faster and data storage capacities continued to increase. And, since we were only dealing in information and the manipulation of information, it became apparent that people in this field really did not need to know much finance because the crucial talent became mathematical model building and data mining. Consequently, backgrounds in physics and mathematics became very useful and the application of Information Theory to data streams provided a source for understanding signals that otherwise appeared to be “white noise.” (A readable source for all these developments can be found in the book “The Quants”: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.)
This financial engineering continues. This is why I believe that the financial reform package has been legacy from the start. The organizations that the financial reform package are supposed to regulate are, in many cases, already beyond the current legislation, and if they are not yet beyond it, the technology is such that they will be soon.
Is financial innovation going to continue to take place? Yes, and, in fact the pace at which it occurs will accelerate. And, this financial innovation is serving as a model for other markets, even for goods and services. This development is related to what is called “Information Markets” and, with the growth in computing power and the expansion of data bases, these markets are going to become more and more a part of how people transact in the future. (Note for example the new commodity ETF called U. S. Commodity Index Fund (trading symbol USCI). http://professional.wsj.com/article/SB10001424052748703418004575456221354231844.html.The economist Robert Shiller (author of Irrational Exuberance) has written path-breaking work in this area.)
Such developments have led to a boom in employment in the finance industry over the last forty years. This relative shift in employment will continue well into the future because it is information based and the use of information technology is going to spread and prosper.
This is why one person, Andy Kessler, a former hedge fund manager, has suggested (tongue-in-cheek) that one way turn the economy around is to import people that would buy homes. He writes: “I would wager there is a backlog of high-paying jobs for educated foreigners well beyond what H1-B visas allow to trickle in. In the name of financial stability, create a million visas for qualified immigrants, say, those with a masters or Ph. D., and watch home prices start to rise.” (http://professional.wsj.com/article/SB10001424052748704147804575455951017059416.html?mod=WSJ_Opinion_LEFTTopOpinion&mg=reno-wsj)
The important distinction here is that Kessler is writing about “educated foreigners” and not unemployed Americans. This seems to be an issue that many analysts are bringing up these days. The jobs that are available for workers are not the jobs that many of the unemployed or underemployed in the United States are able to fill. And, I don’t perceive that there will be a slowdown in the advancement of computing power and other technologies in the future which leads one to conclude that unless something is done about education and training, the United States workforce is going to bifurcate even further between those that can work productively in the 21st century and those that cannot perform at this level. Programs of fiscal stimulus that puts people back into the jobs they formerly held will not succeed only attempt to re-create the past.
Technology will evolve to produce “things” that are smaller and faster and these “things” will be used more and more in the creation and production of “information goods”. Furthermore, the speed at which these advancements take place will continue to accelerate. Organizations set up to operate within the past, like labor unions, are going to have to change and adapt to this environment. Otherwise, they are more of a dis-service to their constituents than a help. But, that is the future.
On the front page of the New York Times we read “Advances Offer Path to Shrink Computer Chips Again” (http://www.nytimes.com/2010/08/31/science/31compute.html?ref=todayspaper). “Scientists at Rice University and Hewlett-Packard are reporting this week that they can overcome a fundamental barrier to the continued rapid miniaturization of computer memory that has been the basis for the consumer electronics revolution.” And to the revolution in the waging of war and keeping of secrets, on advances in finance and business technology and so on and so on.
The problem had been that “the limits of physics and finance faced by chip makers had loomed so large that experts feared a slowdown in the pace of miniaturization that would act like a brake on the ability to pack ever more power into ever smaller devices…”
The new method, discovered at Rice University “involves filaments as thin as five nanometers in width…”
“Separately, H. P. is to announce on Tuesday that it will enter into a commercial partnership with a major semiconductor company to produce a related technology that also has the potential of pushing computer data storage to astronomical densities in the next decade.”
These discoveries, if they prove successful, will help to maintain Moore’s Law, the idea that industry can roughly double the computing power of chips every 18 months, and the Storage Law, the idea that industry can roughly double the amount of data that can be stored every two years. These capabilities have been the back-bone of computing power for the past fifty years or so.
Trends like these are going to continue because there is too much to be lost if they do not. For one, governments cannot allow their countries to fall behind in the development of computing power. There are two reasons for this: first, governments need to keep secrets and so must be able to keep others from breaking codes; second, powerful governments must continue to be able to kill people better than other governments in order to maintain their position in the world. Thus the United States government must continue to finance the development of these capabilities. This is why one can continue to expect the development of a fully operational quantum computer in the next decade.
As with the Eniac computer that was developed in the 1940s to improve the accuracy of firing
shells into the enemy, military needs come first, business benefits follow.
It is my belief in the continuation of such trends that lead me to suggest such things as the ineffectiveness of the newly minted financial regulations even before they become operational. Finance is information. This became apparent in the 1960s when the new computer technology produced faster and faster computers and also produced computers that had the ability to store massive amounts of data from the stock markets. This led to a new industry…quantitative finance. The boom in finance Ph. D.’s got its start with the portfolio theory and CAP-M models developed in these years as it became evident that lots and lots of dissertations could be written given all the data that were now available to researchers.
This industry only grew as computers got faster and data storage capacities continued to increase. And, since we were only dealing in information and the manipulation of information, it became apparent that people in this field really did not need to know much finance because the crucial talent became mathematical model building and data mining. Consequently, backgrounds in physics and mathematics became very useful and the application of Information Theory to data streams provided a source for understanding signals that otherwise appeared to be “white noise.” (A readable source for all these developments can be found in the book “The Quants”: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.)
This financial engineering continues. This is why I believe that the financial reform package has been legacy from the start. The organizations that the financial reform package are supposed to regulate are, in many cases, already beyond the current legislation, and if they are not yet beyond it, the technology is such that they will be soon.
Is financial innovation going to continue to take place? Yes, and, in fact the pace at which it occurs will accelerate. And, this financial innovation is serving as a model for other markets, even for goods and services. This development is related to what is called “Information Markets” and, with the growth in computing power and the expansion of data bases, these markets are going to become more and more a part of how people transact in the future. (Note for example the new commodity ETF called U. S. Commodity Index Fund (trading symbol USCI). http://professional.wsj.com/article/SB10001424052748703418004575456221354231844.html.The economist Robert Shiller (author of Irrational Exuberance) has written path-breaking work in this area.)
Such developments have led to a boom in employment in the finance industry over the last forty years. This relative shift in employment will continue well into the future because it is information based and the use of information technology is going to spread and prosper.
This is why one person, Andy Kessler, a former hedge fund manager, has suggested (tongue-in-cheek) that one way turn the economy around is to import people that would buy homes. He writes: “I would wager there is a backlog of high-paying jobs for educated foreigners well beyond what H1-B visas allow to trickle in. In the name of financial stability, create a million visas for qualified immigrants, say, those with a masters or Ph. D., and watch home prices start to rise.” (http://professional.wsj.com/article/SB10001424052748704147804575455951017059416.html?mod=WSJ_Opinion_LEFTTopOpinion&mg=reno-wsj)
The important distinction here is that Kessler is writing about “educated foreigners” and not unemployed Americans. This seems to be an issue that many analysts are bringing up these days. The jobs that are available for workers are not the jobs that many of the unemployed or underemployed in the United States are able to fill. And, I don’t perceive that there will be a slowdown in the advancement of computing power and other technologies in the future which leads one to conclude that unless something is done about education and training, the United States workforce is going to bifurcate even further between those that can work productively in the 21st century and those that cannot perform at this level. Programs of fiscal stimulus that puts people back into the jobs they formerly held will not succeed only attempt to re-create the past.
Technology will evolve to produce “things” that are smaller and faster and these “things” will be used more and more in the creation and production of “information goods”. Furthermore, the speed at which these advancements take place will continue to accelerate. Organizations set up to operate within the past, like labor unions, are going to have to change and adapt to this environment. Otherwise, they are more of a dis-service to their constituents than a help. But, that is the future.
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