Global Financial Markets and the Bias of Networks
by Felix Stalder, published in: Bosma, J.; Van Mourik Broekman, P.; Byfield, T.; et al. (eds.) Readme! Ascii Culture and the Revenge of Knowledge.New York: Autonomedia. 1999, pp. 104-110

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Media are never neutral. They have biases which deeply affect the cultures that create them, and which, in turn, they create. Harold Innis described the most basic type of bias in communication media.[1] Hieroglyphs and stone, he observed, have a bias towards time, whereas the alphabet and paper among other media have a bias towards space. Cultures built on media with a time bias, such as ancient Egypt, tend to be more concerned with the organization of time and were often governed by a religious bureaucracy. Cultures using media with a space bias, for example ancient Greece, are generally more concerned with the organization of space and privilege secular, state or military, bureaucracies. The printing press joined the alphabet and paper into a new medium, the printed text, unleashing the full power of their combined space biases. This new medium provided the catalyst for phenomena such as the rapid rise of the nation state, the unfolding of scientific rationality, and individuation. Communication media and common culture have a close interrelation in which the media provide the environment in which the social dynamics develop. This environment, however, is not just a simple container, but is a set of distinct processes that reconfigure to a varying degree everything that is carried out through them. Taken together, these processes form the bias of a medium.

To understand the kind of bias introduced into our current culture by the spread of computer networks as communication media, the best place to investigate is not the Internet, but, rather, the financial networks. In contrast to the Internet, where almost nothing has found a well developed form yet, the financial networks have been fully functioning for decades. Furthermore, money itself is a pure medium in the same way than light is a pure medium as Marshall McLuhan once noted: all medium, no content. A similar observation was made by Karl Marx, who wrote in his Grundrisse (1857) that the circulation of money "as the most superficial (in the sense of driven out onto the surface) and the most abstract form of the entire production process is in itself quite without content." [2] Being without content, money can have any form and still be money. It can be a coin in one's pocket or it can be an option traded back and forth between London, Tokyo and New York. Monetary value can take on any form that is supported by the medium in which it circulates. Competitive pressures and the relentless chase for profits under the logic of post-industrial capitalism push monetary value into ever new forms, exploiting the full potential of the new media spaces. This process has consistently expanded the possibilities of the technology to tap into new opportunities for trading. The current financial markets are the most advanced and most media-specific electronic space yet created.

Financial markets have a network-based history of some 25 years. In 1973 Reuters started its screen service, which provided dealers with information and a shared environment to execute the trading in. In 1979 it had already connected 250 000 terminals into the increasingly global markets. [3] At this time the Internet was still in an embryonic state with little more than 100 hosts. In an accelerating volume, huge investments have been poured into the expansion of the financial networks. The ten largest US investment banks, for example, spent in 1995 alone some $17 billion on new technologies: this amounts to more than $400 000 per employee in just one year. [4] Over the last two decades such massive expenditures have turned the financial markets from a relatively peripheral, supporting phenomenon into the central event of the mainstream economy. This development is driven by capitalistic competition, not the technology there cannot be any illusions about that but, nevertheless, the development of the financial markets is enabled and deeply affected by advanced network technologies which create three self-enforcing dynamics:

1. The automation of the financial markets made it possible to increase dramatically the volume of money and transactions. By the mid 1990s about 500 000 people have been working worldwide in the institutions which make up the financial markets. Lowell and Farrell (1996), p.41 They have managed the circulation of more than $1500 billion per day. By far the biggest single market is the foreign currency exchange which amounts to more than $1300 billion per day. In the early 1980s, the foreign exchange transactions were ten times larger that the world trade; in the early 1990s they were sixty times larger. [5] Circulating in ever expandable networks the markets could pick up speed without material friction. As the markets have grown beyond any limitations, more money has become concentrated there. And with deeper markets, the opportunities to make money have expanded, further increasing the incentive to employ the most advanced technology.

2. Automation of the markets makes it possible to provide ever more customized services at ever lower rates, allowing for an increased participation of small investors: the middle class concerned about their pensions becoming insecure in crumbling state pension plans. Not only has the volume of transactions handled in the markets increased, but also the number of market participants and the demographic profile of those participants has changed. It shifted from highly educated professionals to the upper and middle class segments of the general public. Information technology provided the means for putting an easy-to-use interface in front of extremely complex processes. Mutual funds and other previously exotic financial products have become advertised heavily in mass media in recent years. Access through home computers has been created.

3. Increased computerization and increased volume lead to a simultaneous integration and fragmentation of the markets. On the one hand, more and more abstract, complex and entirely computer-based products such as derivatives greatly expand the number and types of tools available to brokers and their customers. On the other, the markets fragmented into a plethora of submarkets. New submarkets create new possibilities for arbitrage Arbitrage is the purchase of a financial product on one market for immediate resale on another market in order to profit from a price discrepancy. which are based on the real-time processing of information.

Pushed to the extreme by these self-enforcing dynamics, the fully integrated financial networks offer the clearest picture of the bias of networks, a bias which affects in one way or another everything that is done through them.

Reconfiguration 1: Content and Context
The financial markets have become their own integral environment which not only communicates, but also produces the events communicated the rise and the fall of prices. As such, these networks are content and context at the same time. The surrounding larger social and economic environment is structurally separated and its relevance is assessed according to whether it has to be translated into the closed universe of the financial market or not. News, for example, is evaluated primarily from the vantage point of whether it is going to influence the fever curve of the market. The importance of information is decided within the markets and is independent from the "value" of the information as such. The context of the market defines the content of the information. If everyone expects a company, or a country, to report huge losses, then the news of merely moderate losses boosts the price. In contrast, if everyone expects the opposite, the same piece of information can have a devastating influence on the market value of the asset.

As an integral environment, the financial networks are fully self-referential. Everything that counts happens within the networks. The single most important questions is: what are the other participants doing? Since the direct connection to other environments is broken, the ultimate determination of the (immediate) future takes place within the markets themselves. Evidently, the markets react very fast to new information and the consequences of political and economic events are almost immediate. Nevertheless, the connection is indirect. The markets as a closed system react to news because the dealers, or the artificial intelligence systems, expect each other to react and each tries to react before everyone else. It is the expectation of a reaction to an event that drives the development, not the event itself. John M. Keynes described this structure in his famous beauty contest analogy:

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not the case of choosing those which, to the best of one's judgment, are really the prettiest, not even those which average opinion genuinely thinks the prettiest. We have reached the third degree, where we devote our intelligence to anticipating what average opinion expects average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. [6]

Evidently, Keynes described that tendency long before the advent of computer networks. Because it was such a perfect match of the general dynamics of financial markets and the bias of networks the technology proved to be such an explosive catalyst when they were combined in the early 1970s.

The merger of content and context became expressed most clearly in the infrastructure. Reuters, which started in 1849 as a pigeon carrier for sending stock exchange data from Brussels to Aachen in order to bridge the gap between the Belgian and the German telegraph lines, is today's leading provider of news to the financial markets, a service that is delivered over a proprietary network. It brings news and prices directly to customer screens, providing datafeeds to financial markets, and the software tools to analyze the data. This data covers currencies, stocks, bonds, futures, options and other instruments. Its main customers are the world's leading financial institutions, traders, brokers, dealers, analysts, investors and corporate treasurers. However, Reuters not only provides the news for the market, Reuters is also the environment of the markets themselves. It provides the tools for dealers to contact counterparts through a Reuters communications network in order to do the actual tradings. Through proprietary instruments Reuters enables traders to deal from their keyboards in such markets as foreign exchange, futures, options, and securities. Consumer of news and producer of news merge and the network displays instantly to everyone what everyone else does. Reuters, in other words, produces (parts of) the news itself which are then sold back, stimulating the production of further news.

Reconfiguration 2: Cooperation and Competition
The self-referentiality of the network environment creates information which has to be taken at face value. Its reality is as flat as the screen on which the data is displayed, its only relation is to other information of the same flatness, other screens to which every screen is connected. This radical decontextualization permits the increased speeding up of its circulation, which again eliminates the possibility for checking the veracity of the information. In such an environment news and rumors become equally important. Sometimes rumors become even more important than news, since they hold the promise of predicting for the insider what might be news tomorrow for everyone. What will be, accurate speculation into the future, is the most valuable information and can actually become the cause of tomorrow's news. If some of the major dealers expect a currency to lose value, they will start to sell it, which will be seen by others as a sign that the value of this currency is falling. The result is that, if many start to sell, the value of the currency is actually sinking: Georg Soros' reflexivity. [7] This has been staged over and over in the recurrent currency crises, be it the European in 1992-1993 or the Asian in 1997.

Jean Baudrillard has put this reversal of the relationship of expectation and event, of sign and object, at the core of his thinking. "We are in the logic of simulation" he declares, "which has nothing to do with the logic of facts and the order of reasons. Simulation is characterized by a precession of the model, of all models around the merest factthe models come first, and their orbital (like the bomb) circulation constitutes the genuine magnetic field of events. Facts no longer have any trajectory of their own, they arise at the intersection of the models." [8] Not anticipated in the gloomy metaphors of Baudrillard is the effect of that reversal in the network environment: cooperation. Since networks are tools and environment at the same time, everyone who uses the tools is dependent on the maintenance of the environment. Since the environment is closed, there can be no outside position for anyone who wants to participate. It is not incidental that the game metaphor is dominant in the financial markets. Every market player cooperates to uphold the rules, the parameters of the game, but within these limited bounds, each tries to kill the other.

Financial markets can only function efficiently at high speed when information can actually be taken at face value. To guarantee this they have to be structurally separated from other environments. Crucial for this is the institution of the clearing house. A clearing house functions as a "middleman" who acts as a seller to all buyers and as a buyer to all sellers: it is the guarantor of the ultimate fulfillment of the contract. Thus contracts can be exchanged impersonally between numerous parties on both sides without any having to worry about the others' ability or willingness to carry out their obligations. The largest private sector payments network in the world is Clearing House Interbank Payments System (CHIPS) in N.Y.C. About 182 000 interbank transfers valued at nearly $1.2 trillion are made daily through the network. This represent about 90 percent of all interbank transfers relating to international dollar payments. Federal Reserve Bank of NYC, A clearing house can be understood as an outsourced and institutionalized system of trust designed to cope with an anonymous and chaotic environment. It is a communal insurance institution for guaranteeing that the constant flow within the networks is not interrupted by external events, such as the default of one of the participants. Without the clearing house, such a "real life" event would be translated directly into the network. The possibility of such a direct impact would destroy the face value of the information. The clearing house, then, can be read as a buffer that prevents the direct, uncushioned impact of the external environment from breaking open the closed circuits. Without this buffer, the exchange of information would slow down considerably because the value of the information would have to be verified outside the network itself.

In the network environment, then, the condition of staying a member of the network is to provide information that can be taken at face value. The position of a player is determined by the information he, she, or it delivers to the other players, the faster and the more accurate the information is, the more relevant the source becomes. Since everyone is connected with everyone, reliable information gets delivered to the environment as such. Even in the most competitive environments this connectiveness forces a certain form of collaboration. What seems paradoxical is a characteristic of the network media: they configure communities defined by a distinction between inside and outside. The distinction is maintained by cooperation to build the communal environment, even if it is then used to stage fierce competition.

Reconfiguration 3: Control and Unpredictability
A network's connectiveness is not only defined by its ability to connect people across time and space, a second characteristic is a tendency to integrate formerly independent elements on a higher level of abstraction. Abstraction allows the construction of larger areas of control, in the financial markets through instruments such as options. They are the right but not the obligation to buy or sell an underlying asset for a predetermined price in the future. This allows traders to speculate much more extensively on the movements of the markets independent from the direction of this movement. However, since options permit speculation on the movement of the asset rather than on the asset itself, these instruments become more volatile and, at the same time, the environment less predictable. There are simply too many factors to exercise real control. Increased abstraction and its possibilities to extend influence over ever greater area create a paradox of control. "When a multitude of different and competing actors" as Geoff Mulgan notes, "seek to improve their control capacities, then the result at the level of the system is a breakdown of control. What is rational at the micro level becomes highly irrational at the macro level." [9] The unpredictability is a result not of too little but too much control.

With the number of connections and the speed of communication rising, the predictability and controllability of the system as a whole is decreasing. The reconfiguration of control and unpredictability is similar to the reconfiguration of cooperation and competition: which aspect is foregrounded depends on the position of the observer. From the inside, the cooperative structure of the financial networks provides the invisible environment for deeply chaotic and intense competition. From the outside, this competition turns into a zero-sum game and the markets represent a single cooperative logic, the "commodified democracy of profit making" (Castells), executed in a tightly controlled framework dominated by a very small number of global financial giants. These fundamental differences based on an inside or outside position of the observer illustrate how closed the financial networks are and how self-referential their logic is.

In general, networks reconfigure not only aspects of control with unpredictability, cooperation with competition, and content with context, but they also connect action with reaction, event with news, into the continuity of flows. The dealers see instantly what others do, which creates the basis of their actions, which are fed back to the other dealers building their decisions upon them. This constant feedback eliminates the separation of events and news, action and reaction, before and after, and merges them into a constant presence. "The space of flows", as Manuel Castells observes, "dissolves time by disordering the sequence of events and making them simultaneous, thus installing society in an eternal ephemerality." [10]

The Bias of Networks
Global financial markets are to computer networks what the Reformation was to the printing press: the first major social event enabled by the new technology. Financial markets have not been created by the new technology, they existed long before. However, new technologies have been the catalyst which connected heterogeneous trends into a self-enforcing dynamic. Because those trends fit the bias of the medium they could expand out of all proportion, creating new social conditions which reflect the impact of this bias in the specific historic context. Every single element of the financial markets existed independently for decades. The first clearing house, for example, was founded by the Chicago Board of Trade in 1874, but only the network conditions raised this institution to its current, central importance.
As the Reformation was not caused by the printing press, the financial markets are not the fate of the networks. The new technology has been a catalyst which has hugely augmented the impact of a series of economic and political decisions taken in the last thirty years. However, it did not simply augment the impact of these decisions, by reflecting them through their own bias the new technologies have deeply shaped outcome. The bias of networks lies in the creation of a new space-time condition of binary states of presence or absence. In the network environment everything that is the case is here and now (inside the network), and everything else in nowhere and never (outside the network). The translation from one state to the other is instantaneous and discontinuous. The experience of any sequence is introduced by the user, that is, from outside the network, and is arbitrary from the point of view of the possibilities of the network.

While this newly created space-time is the ingredient added by the technology, the result of its catalytic potential is deeply affected by the conditions under which it is brought to bear. The financial markets grew not only because the technology provided the ground for it, but also because regulatory restrictions have been removed under the increasing influence of neo-liberalism. While the bias of the medium largely lies outside social influence, the quality of the culture incorporating this bias is and has always been shaped by society itself.

[1] Innis, Harold, A. (1950). Empire and Communications. Oxford: Clarendon Press (1951). The Bias of Communication. Toronto: University of Toronto Press

[2] Quoted in: Spivak, Gayatri C. (1987). "Speculations on Reading Marx: After Reading Derrida." pp. 30-62 in Attridge, Derek and Geoff Bennington, et al. (eds.) Post-Structuralism and the Question of History. Cambridge: Cambridge University Press, p.32

[3] Fallon, Padraic (1994). The Age of Economic Reason.; pp. 28-35 Euromoney, June

[4] Lowell, Bryan and Diana Farrell (1996). Market Unbound: Unleashing Global Capitalism. New York: John Wily & Sons, Inc. p.41

[5] Sassen, Saskia (1996). Losing Control? Sovereignty in an Age of Globalization. New York: Columbia Press p.40

[6] Keynes, John M. (1936). The General Theory of Employment, Interest and Money. London: MacMillan, p.156

[7] Soros, George (1997). The Capitalist Threat. pp. 45-58 The Atlantic Monthly, February, Volume 279, No. 2 available at:

[8] Baudrillard, Jean (1983). Simulations. New York: Semiotext[e], pp. 31-32

[9] Mulgan, Geoff (1991). Communication and Control, Networks and the New Economies of Communication. New York, London: Guilford Press, p.29

[10] (Castells, Manuel (1996). The Rise of the Network Society, The Information Age: Economy, Society and Culture, Vol. I. Cambridge, MA; Oxford, UK: Blackwell, p.467)

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