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Introduction: Living with the markets

Date 25/06/2002

Sir Peter Job

Living with markets is like living in a complex human relationship -- whether it be marriage, friendship or close co-operation with business colleagues. It only works if you are prepared to spend the necessary effort to understand the subtlety and individual distinction -- or quirks -- of each other. This book is so complete as to give practitioners no excuse for misunderstanding even the finer points.

Markets are an important expression of freedom in the sense that they offer individuals, groups of people and organisations the opportunity to decide how they want to trade and to be judged by the liquidity they produce as to whether they survive or wither.

Freedom is limited both by self-regulation and official regulation. Both the expression of freedom to trade and the forces limiting and controlling that freedom take on many forms world-wide. These forms can reflect cultural differences and a long history of exchange, barter and auction or other entrenched habit.

In a sense that is the easiest part. The crescendo of technological advance in recent decades has stimulated big leaps forward not only in terms of technology itself but also in the accompanying development of conceptual thinking about crystallisation of value. This challenges traders and regulators alike to come to terms with a new world.

The proliferating ways to trade are as fertile as the human mind itself. Almost every one of us takes a different view of what the future will bring, and the freedom to diverge is the basis of a bargain. Technology changes nothing here. Dealing on differences through the sometimes noisy but basically peaceful means of exchange is one way we progress without tearing our systems apart.

What technology does can also be exaggerated. Hence the great kerfuffle over Internet-based 'exchanges', which have so far produced rather little. The explanation is not hard to find. It was easy for people to imagine that the big players in an industry could come together to create an exchange for any type of goods and use the opportunity to put pressure on their smaller suppliers by commoditising their products and services openly.

Those who read this book will already know that this is not how markets work. No one can force the small to capitulate to the big in a market any more than they can, in civilised circumstances, anywhere else.To be a market participant means risking disclosure of positions.In the end, who knows, the big players could finish up being 'shorted' by the small ones, agile as they are, who spot an impending general commodity deficit.

Technology does however remove the wrinkles of age and remove the obscurity of eccentric habits in trading. Arbitrage is no longer a function of doing mathematics in your head more
quickly than anyone else. Computers make it easier to strip away the veils which conceal comparable value across markets. In doing so, computers help to set standards of disclosure. Markets know they do not sit comfortably in isolated pockets of wealth any longer. The specialists who use them have a broader global view nowadays. I imagine them perusing this book to make sure they understand the connection between all traded things.

With technology comes speed and sharper competition. It started with the revolutionary marriage of information and computers back in the 60s, which progressively peeled off layers of non-transparency in markets. It has moved on to faster processing, yielding more trust and efficiency as well as less risk and cost. The volume of trading that these developments have made possible has caused rapid and distressing retribution for those who indulge in irrational economic behaviour. Even those who are not irrational, but temporarily out of balance, risk being swept off their feet -- and complain loudly about it.

Competition induced by technology has several important consequences which are still being worked out. There is a tendency towards trans-national consolidation amongst markets and market players, not least because computers talk to each other rapidly without dissemblance once they are instructed to do so. They do not know when they cross a border. The means of making them talk together are every day more powerful. Profit from non-transparent markets is evaporating -- but, against that, scale is rewarding and easier to achieve than it used to be.

Technology also serves the nimbler players. As the emergence of the ECNs in the United States has shown, it only takes a brief period of atrophy in a big market organisation to spawn a wealth of alternative solutions which move the market on willy-nilly to a new type of model. Terminals become not just instruments of knowledge, but sniffer dogs which can find the quickest cheapest outcome across a range of possibilities.

Probably the biggest effect is on the end customer. Never before in anyone's lifetime have so many elements of judgement and possibilities of action been available to the individual investor at so cheap a cost. As always, the financial houses have arrived at the future before the individual investor -- they are rapidly working out how to cope with it and turn progress to advantage. In so far as the investor shares in the gradual perfection of the financial process, as the Internet allows him or her to do, this will be one of the important guarantees of vibrant markets in the next decade. And it will also offer a much firmer guarantee that people all over the developed world can learn to look after themselves better, as they wake up to the idea (some faster than others) that governments can no longer save them from all life's expense or hardship in old age.

Sir Peter Job was formerly Chief Executive of Reuters Group plc and is now a non-executive director of GlaxoSmithKline, Shell Transport and Schroders. He is a member of the Supervisory Board of Deutsche Bank and Chairman of the International Advisory Council of NASDAQ.