Ghost Exchange: Complexity, Velocity, and Risk

Increased complexity leads to increased risk. Stock markets run by algorithms, creating virtual markets that even the experts have difficulty explaining. The “flash crash,” “dark pools,” and “high-frequency trading”—what do they all mean? Throughout 2018, and now into 2019, we have witnessed some extreme volatility on stock markets, sometimes with swings so huge that many of the usual market commentators were left audibly speechless, stammering through bewildered confusion as to what may be the cause of this fall or that rise. Otherwise announcements of an impending collapse have become mainstream. The divorce between finance and the economy never stood out more clearly; the circulation of values (including imaginary, speculative ones) and the production of goods seemed to occur on two different planets. One day, Reuters reports on negative stock market news, warning that the trade war was “finally hitting home”—yet on the very next day, Reuters reports a “robust” (then changing the word to “upbeat”) employment report that “underscores US economic strength,” given a massive increase in employment (not dependent on the recent holiday) and a surge in wages. A strong economy and a shaky stock market—apparently both things can sometimes be true at the same time. Can rising or falling stock market numbers be read as if they were ratings on an economy, like telemetry reporting on the life signs of the economy? Financial crises breed very severe “real world” effects, so it’s not like ignoring what is happening on the stock markets is a wise move. But what causes these strange and extreme swings on the stock market, and how much are they related to the real world? What is behind the rapid collapse of values or sudden surges? What are the solutions to the problems of increased complexity, velocity, volatility, and loss of confidence?

(This review is part of a trilogy, one that began with “‘The China Hustle’ is a Problematic Cautionary Tale,” and continued with “‘Inside Job’ is Still Relevant”.)

Ghost Exchange

Ghost Exchange (2013) (archived film website, filmmakers’ overview, and see the trailer below) is a pretty exciting documentary, given subject matter that might otherwise appeal only to financial “nerds”. Directed by Camilla Sullivan and Rob Lyall, written by Camilla Sullivan, and distributed by Arbitrage Pictures, Ghost Exchange runs for a very compact and fast-paced 85 minutes. It becomes obvious that Camilla Sullivan, like a good ethnographer, established a particularly positive rapport with the many experts featured in the film—they are clearly very comfortable with her, even willing to engage in humorous play, all of them look her straight in the eyes when speaking, and they always seem to be at great ease in speaking with her. The experts include a former US senator, a professor, several CEOs, and a mathematician who formerly worked for one of the trading firms before joining “Occupy Wall Street”. When watching this film it becomes clear that financial markets, and how they are structured, must become the subject of democratic decision-making and should become embedded in the broader public’s awareness. If left in the hands of elite managers and executives, we will continue to have the mess outlined below.

The film is roughly divided into the following parts: The Flash Crash; the London Whale; Facebook IPO; Knight Capital; and, the complexity issue. However, it should be noted that the film is not evenly and logically structured into clear-cut “chapters”.

According to the filmmakers’ synopsis, “the US stock market has built so much speed and complexity into the current system that it is impossible to regulate”. The film explores the impacts of high frequency and algorithmic trading, and the general lack of effective regulation and oversight, that could produce the next big market crash. In the meantime, there is a decline in worldwide confidence in the market. As for how financial markets tie in with the real world economy, the filmmakers note that financial markets provide “a vital link between investors and businesses in need of capital” and that they “enable companies and governments to raise funds for operations, and investors to participate and earn a return”. This is why the stable operation of the markets is important for the health of the entire global economy.

The “ghost exchange” idea refers to the invisible technology that powers these markets, with nearly 75% of stock trades in the US being conducted by mathematical algorithms, by machines “talking” to other machines and reacting instantaneously. As the filmmakers state, “machines trade against each other, chasing mathematical models written by an elite group of engineers and mathematicians”. Wall Street itself does not matter as much as it used to: there are now more than 50 trading venues when before it used to be primarily just the NYSE, NASDAQ, and the American Stock Exchange (AMEX). Today the majority of trading venues are unregulated “dark pools”. The film is about how all of this happened, what are the implications, and how to understand key events such as the “Flash Crash” of 2010 (they will have to add the Flash Crash of December 2018 perhaps) and the trading system crash for the Facebook IPO in 2012. Traders aside, anyone whose pension is tied up with the stock market will be keenly interested in movies like this one.

Seismic Events? The Flash Crash, the London Whale, and the Facebook IPO

The film opens with a series of clips, similar to what you see in the trailer below, that speak of two things: a) an information-based arms race between traders, and, b) regulatory bodies unable to keep up with the rapid invention of new technologies. The narrator tells us that since May of 2010, “powerful tremors” have exposed major “fault lines” running through US capital markets, that endanger the entire economy. They speak of “quakes” happening with increasing frequency, in what sounds like the discourse of geologists—except we are not dealing with a force of nature.

The immediate focus of the film turns to the Flash Crash of May, 2010, where stock markets plunged nearly 10% in just a matter of minutes. The trading day began with speculators watching violence in the streets of Athens, with protests raging against severe public spending cuts. Then it was as if the chaos spread to the stock markets themselves, and some shares began to trade for as little as a penny, according to one of the experts cited in the film. Things that should never have happened in a stable, well-regulated market, began to happen, and those involved did not know why they happened. About $300 billion were taken out of the market after the 2010 Flash Crash. Also difficult to explain was the London Whale of May, 2012, that saw $5 billion wiped from JP Morgan’s values. Then in May, 2012, on Facebook’s first day of trading, NASDAQ computers became overloaded so that investors were unable to execute orders, with nearly $500 million in losses for that day alone. Some traders noted incomprehensible behaviours in the system—a share being offered for $25 receiving a bid for $4,000, for example. During 17 seconds that the trading system went dark, it became vulnerable to any “bad news” that entered the system, introducing further volatility. The existing computer programs tend to amplify “bad news” much more quickly than any human could process the information. On August 3, 2012, high-frequency trading resulted in massive losses for Knight Capital. Investors lost $440 million in just half an hour that day. A “software problem” was blamed by the financial media. Knight Capital was seen by investors and the media as a trusted, robust trading firm with an excellent reputation, until that day.

The filmmakers, going back to their geological analogies, warn of the dangers of a far greater “seismic event” in the near future (again, this past December’s crash might be one such event). “Chances are,” the narrator states, “it will have nothing to do with the lack of entrepreneurial ideas in America, or the fundamental performance of the stocks involved”. The problem will instead be a structural one: “sudden market seizure could be systemic and irreversible”.

Occupy What?

We are then taken to the floor of the New York Stock Exchange, where we encounter what most of us commonly assume is involved in trading: traders, on the floor, hustling, discussing face to face, in a frenzy of buying and selling, quickly scrawling down notes on mysterious slips of apparently very important paper. The NYSE forms part of an iconic district to which countless tourists flock—the “hallowed ground” of capitalism. It is thus seen as the “nexus of US financial markets”. But, “there is just one thing,” the narrator adds: the tourists are standing “on the wrong side of the river”.

Bill O’Brien

“Occupy Wall Street” protesters stood in the streets expending their energies shouting at buildings that by then had long been converted to condos. The “Occupiers,” like many tourists and many of us, behaved as if they were completely uninformed about the nature of stock trading today, which takes place in quieter, more obscure, less iconic places. The floor of the NYSE itself is likened to more of a “media studio” and “backdrop” by one of the film’s expert traders, John Netto of M3 Capital. Only a very small minority of trades occur at locations such as the NYSE. As Bill O’Brien, the CEO of DirectEdge says in the film, almost all of the stock trading that happens today in the US occurs inside the borders of the State of New Jersey— the new Wall Street. Both the physical offices of numerous trading firms, plus the big data centres where all the computer systems are housed, are all in New Jersey. What we think are the places at the heart of the stock market, “are really just glorified TV studios,” O’Brien notes.

DirectEdge—not a household name, as the filmmakers admit—conducts between and one and two billion stock trades, every day. This means that DirectEdge is either the third or fourth largest stock market in the US. Under Bill O’Brien, DirectEdge experienced a rate of growth in just 18 months that took the NYSE nine years to achieve.

“What’s now left in lower Manhattan is a museum to stock exchange nostalgia,” the film’s narrator tells us. “After all,” she adds, “the neo-classical, heritage-classified building housing the New York Stock Exchange since 1903, is a lot more comforting an image than a warehouse in suburban New Jersey”.

High-Frequency Trading, Ticks, Latency Arbitrage, and Dark Pools

Gus Sauter

The costs of operating a stock exchange have been reduced by more than 99%, according to O’Brien, and now the NYSE and NASDAQ are just two among more than 40 competing stock exchanges in the US, which includes DirectEdge. Part of the reduction of costs is attributable to automation and electronic trading. Gus Sauter, Director and Chief Investment Officer of the Vanguard Group who would oversee over $1.3 trillion in assets on a daily basis, appears in the film and warns that such a system also presents some dangers to investors—otherwise, he generally seems enthusiastic about the current system. “High-frequency trading,” which Sauter notes is often used as a dirty word, covers many different strategies which he asserts are valuable for connecting markets. “High-frequency trading,” according to John Netto, is little more than the execution of a trade strategy at such a velocity that it could never have been done manually.

Eric Hunsader, the Director and CEO of Nanex, comments that, “electronic trading is what brought down costs, but high-frequency trading brought down ethics”. Hunsader also notes the kind of irrationality that has entered the system, pointing to 30,000 different price changes—in one second—that occurred with Disney stock.

Part of the demand for computerization has to do with the ability to contend with increased complexity created by…tick sizes. A “tick” is the smallest increment of a price, and whereas many years ago a dollar might have been divided into four price points, now we have ticks as small as 1/100th of a dollar, and even smaller. Four price points can become a thousand. This created an “avalanche of interest” in algorithmic trading. Today it is estimated, the narrator informs us, that between 50% and 75% of all stock trades in the US involve no direct human input (aside from the writing of the algorithms).

With increased automation, with trading handed over to artificial intelligence systems running specialized algorithms, it is computers that decide when and how much to buy or sell. They do so in part on the basis of data feeds from the stock exchanges, which can include everything from a press release about a new patent, to detecting popular search trends on Google. Trading software can synthesize any type of information that can be read electronically. What the filmmakers don’t ask is whether or not this kind of system can be “gamed”. Can the deliberate production of certain “news” affect the stock markets? How much of what the media produce today is done with an eye on affecting the stock markets? Do Donald Trump’s tweets get read by the data feeds synthesized by these algorithms? How much of what we know as stock markets trends really just a chimera manufactured by the media environment?

Seth Merrin

Another problem, as explained by one of the film’s experts, is “latency arbitrage” where someone waits to see what you are buying and selling, and then manages to step in front of you with a competing offer. This is a result of leaked information, and to avoid leaking what some traders do is to move into “dark pools”. Those outside of the dark pools do not know what is being traded, or how much. A dark pool is a trading network established outside of public exchanges. Inside dark pools, trades can be executed anonymously, both in terms of the size of the trade and the identity of the traders. This way investors can buy and sell more or less secretly, without betraying their strategy to a larger audience. Prices are revealed to the public only after an order has been fully executed. It also means that a larger volume of trading is occurring outside of the surveillance of public regulators. Liquidnet is a global dark trading pool, and its CEO, Seth Merrin, appears in the film to defend dark pools.

(For more vocabulary related to high-frequency trading, see this Investopedia glossary.)

Algorithms, Velocity, and Complexity

In a system of “trading phantoms” and “systematized intelligence,” the top financial institutions such as CitiGroup, JP Morgan Chase, and Goldman Sachs, invested heavily in the creation of proprietary algorithms, their “black boxes” in the trading game. In doing so, they turned to universities, searching out those with elite quantitative and financial engineering programs.

“Velocity” is perhaps the premiere concern of this documentary. Increased velocity and increased complexity seem to be mutually constructive, in a system that also produces increased selectivity: not all firms are able to compete in such an environment, so some fail while others succeed. It’s a technological application of Darwinian principles that we see at work in this film. In what seems like a form of resistance to this system, countries such as Australia and Singapore have not allowed speed and complexity to become embedded in the structure of their markets—whereas the US lacks any such regulation. Eric Hunsader makes the point that “speed” does not equate with “smart”—there is nothing “smart” about an algorithm losing a company $400 million in 30 minutes.

“Complexity” is another key theme, and here most of the traders interviewed seem to be complaining about the increasingly complex nature of trading. David Weild IV states that he has spent his entire life in the market, and even he does not understand the market in its totality. One gets the impression that the supposed free marketeers secretly view a really free market as terrifying. They tend to describe increased freedom as a kind of monster (a “Frankenstein market” one says) that needs to be “reined back in” or “put back into the bottle”. The loss of confidence leads to a loss of capital; lack of faith in the integrity of the market means that investors put their money elsewhere, and that eventually harms economic growth. “I trade perception, not reality,” says John Netto, indicating the impact of confidence and how the public views the market as being critical factors in expanding the market. Another problem is that it is becoming more difficult for companies to go public in the US, which means that potentially profitable start-ups never see the light of day, and jobs are not created. The complexity issue is thus a fundamental one.

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Risk, Trust, and Regulation

What is resented by some of the trading executives is that there is growing distrust of the market, that some potential investors see the market as something too murky to penetrate and they think there are some secretive insiders who understand how it works as opposed to the mass of trading firms that are supposedly clueless—the film does not attempt to show whether or not this view is really established among investors. Mastering complexity seems to be addressed through regulation—though it’s not clear why the filmmakers think that, and it appears to be a non sequitur. Nevertheless, on the regulation theme a number of the film’s interviewed experts think that the problem is that regulators tend to be lawyers, rather than people with knowledge of the technology. In other words, knowledge is what masters complexity—regulation is a separate matter. The film itself does not pause even for a moment to digest or reflect on the questions it raises.

The film’s basic message, that “more regulation is good,” treats regulation as a reasonable proposition, a given, when the film’s own experts do not seem to back up the idea. The film narrative thus contains the seed of a major contradiction: increased regulation can add to the very complexity that “more regulation” was supposed to solve. Some of those interviewed thus seem understandably indifferent to calls for more regulation. Others say that regulation does not need to be “increased”, it needs to become more “intelligent”. A professor warns that regulators who do not know what they are doing, will do more harm than good. One insider does not see an absence of rules, but rather traders who do not follow the rules and are not caught by regulators. Another view is that what is needed are “principles” and not “rules”—and no new rules are needed. One comments on the excessive number of pages contained in the post-2008 regulations known as Dodd-Frank, saying they are mostly unnecessary. To me it seemed that American capitalists have created their own problems, have become frightened by their ability to create such problems, and now sit around staring at each other wondering about solutions. Dynamic fecklessness, innovative complaining, articulate fear, and smart bewilderment seem to constitute those other, unspoken qualities for being a “successful” fund manager.

All of the film’s insiders agree that the regulations introduced by Congress after the 2008 financial crisis do not address the fundamental problems with the structure of the market. Cathy O’Neil, who left the world of finance for “Occupy Wall Street,” argues for legislating a simpler financial system—she also calls for “regulating against lying” and to “regulate against just being an a**hole”. Speaking in 2013, most of them agree that the economy was barely growing, investor confidence was down, fewer public companies than ever existed, and some foresaw this as the start of the long decline of American financial power. The film’s final 25 minutes are an almost impassioned and especially intense series of calls for “smarter” regulation, for building public trust, and for making financial markets the subject of broadly democratic decision-making. At the same time, the speakers seem remarkably pessimistic that such fundamental changes can or will occur. There is also a firm belief among some of the film’s experts that another massive financial meltdown will happen in the future.

Fear and Other Cultural Problems

What is also shown is the basic fear of a really free market that exists within the heart of the US financial capitalist system. And what does this really free market have to offer? The glimpses we get of it are described in terms of instability, volatility, fears, ignorance, and crashes. If these are going to be the results of a free market society, then neoliberals/libertarians need to go back to the drawing board and keep asking themselves why they continue to meet with so much popular rejection. The second rejection built into this film is of high-speed, quantitative electronic technology, and specifically algorithms. Algorithms come across as just a little bit hysterical: overly fastidious about inputs, and prone to amplify any volatility beyond what a human normally would do. Who needs programmed freak outs and systematic breakdowns? Perhaps the programmers need to undergo intensive psychological screening before they are hired.

What the film does not explore, but a critical anthropologist might detect, is that there is a basic cultural problem at work in all of this mess. The problem lies not just with how algorithms are written such that they become volatile and freak out, and not just regulators who do not understand what they are regulating, but also in how we tell stories to each other: fragmented, scattered, rushed, unstable, and illogical.


Among the shortcomings of the film, with its heavy reliance on experts talking to the camera, is the uneven editing and structuring of the film. For example, one expert complains about the manipulation of the market by unscrupulous traders making bids in order to influence a price, and the very next person talks about how algorithms were designed to go after “dumb” people. Are these two points related? If so, how? The film raises one point, introduces a new figure, then drops it at and switches back to a previous theme, without explanation. We thus hear of a Mary Shapiro, a particularly competent regulator they tell us—and then she vanishes. The structure is thus too loose and chaotic, and with the information presented in such a scatter-shot fashion it is bound to cause some viewers to lose interest, or at least lose focus. On the other hand, viewers may start to wonder: the problem here seems to be more generalized than algorithms alone, it’s also present in how we tell stories. Otherwise, there is also a great deal of repetition of simple and basic points: limited knowledge, limited understanding, and need for more regulation. Yet, considering the fact that the film essentially consists of about a dozen mini-lectures given by the interviewed experts, broken up into different pieces, it’s impressive that the filmmakers are able to generate and sustain interest, even building drama into the film.

This documentary might be useful for showing in classes dealing with finance, political economy, international economics, and public administration. Economic anthropologists might also find it useful for their courses. On the whole, and taking the shortcomings into account, I would give this film a score of 8/10.

(This documentary review forms part of the political economy series on Zero Anthropology. This documentary was viewed four times before the written review was published. All of the images above consist of still frames from the film.)


One thought on “Ghost Exchange: Complexity, Velocity, and Risk

  1. Maximilian C. Forte

    Here is an interesting article spotted by a reader, “The Analog Tipping Points Lurking in Tech’s Future” (Jan. 27, 2019), by John Andrews. The author was the head of Investor Relations for Morgan Stanley, Goldman Sachs, Citadel, Citigroup and Deutsche Bank–his argument bridges regulation of the banking industry with regulation of what he calls the tech industry, and here he includes media corporations and particularly social media. The many praises of that industry’s alleged positive impacts have, as Andrews argues, overshadowed its disruptive qualities. As he writes in his article,

    “Uber, Amazon, Google, Facebook, and Twitter have crossed a socioeconomic Rubicon of sorts. Their scale and impact has become too significant to ignore and they are now colliding with a complicated ‘analog’ world of politicians, regulators and the media. Even the least savvy intuitively know that technological disruption is accelerating and the list of tech companies who will join the ranks of those being scrutinized today will grow”.

    Andrews also links banking with technology and globalization:

    “many in tech will undoubtedly content themselves with the belief that technology’s march will continue unabated – because it drives positive change.

    Those with that mindset might contemplate the recent travails of globalization as a cautionary tale. Globalization and technology have been the two great secular forces of our lifetimes. Globalization lifted huge numbers out of poverty, but it nonetheless created socioeconomic disruption for many. However, the plight of those who suffered from globalization’s effects were largely ignored, particularly by policymakers. For decades the view remained that globalization was a positive and an unstoppable force. Those disrupted could do little to slow or contain it.

    Until they could.

    And they did so using that old analog technology of the ballot box.”

    I recommend the rest of the article, and the comments discussing it.

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