Initial extract of essay by Raffaele Mauro out tomorrow on new number of LIMES.
Finance is the nervous system of capitalism. An extensive, abstract and dynamic structure that accompanies the functioning of an increasingly interconnected world economy. A network of networks whose complexity transcends the traditional interpretations of economic phenomena. Increasingly in the popular press are technical terms – credit default swaps, spreads, futures, etc. – which until recently seemed secret to specialists. There is discussion on the weight that finance should have in the priorities of a modern economy, on the structure of wages, on the possible deontological consistency of the players involved. In this context full of political considerations, an exercise in detachment is useful, to understand how the system really works and how it is developing.
Despite the great attention dedicated to the sector, the current debate does not highlight some fundamental elements that are driving its evolution. In addition to the well-known factors that have determined the current configuration of financial markets – deregulation, globalization, financial innovation – technology has also played an essential role. Historically this has been fundamental for the structure of the markets: information and communication technologies make operations faster and more efficient. But there is another technological trend which, despite the lack of media coverage, is assuming an important role. Today information technologies not only have an infrastructural value, to support the execution of investment decisions, but are at the center of the dynamics of the sector. Algorithms and virtual agents are involved in trading, autonomously producing and executing important securities and capital movements.
Algorithmic trading or algotrading is the advanced use of programs and automatic systems for defining the price, quantity and timing of orders. Increasingly it happens that these operations are carried out without human intervention, which often boils down to emergency management and veto power over the riskiest positions.
An exemplary case of success is that of Renaissance Technologies, the fund created by the legendary Jim Simons, who, with 23 billion dollars of assets under management, i.e. funds entrusted by third parties, is one of the leading hedge funds in the world. Facilities such as Renaissance Technologies look not so much like traditional financial institutions as research centers: a significant portion of employees are quants, people with advanced training in mathematics, physics and quantitative methods which aim to build increasingly advanced models and algorithms, tackling financial issues in ways similar to those in which research is carried out in the natural sciences.
The full article will be available on new number of LIMES out on newsstands and in bookstores from Thursday 29.
