Sticking to the themes of the future covered yesterday, I wrote a white paper on the future of trading recently.
Here's a short abstract:
Lee Nixon opened his eyes as the room’s walls illuminated to intensity
level 4. The walls were set to brighten gradually from 1:45 a.m. and it
was now 2:00. Another fifteen minutes and intensity level 10 brightens
to seem like a summer’s day.
Lee liked the luminescent orange sunrise effect of the walls best as it
made him feel warm and summery, even though the world outside was deep
in the snows of winter and the dark of night. He usually woke at this
time though, as he was known as a leader in futures trading in the
world’s rarest commodity: Water.
Water had been recognised as a potentially lucrative commodity market
since the late 1990’s, when the International Water Management
Institute estimated that Earth would need 17% more water by 2025 than
the water resources available at that time. The trouble was that no-one
in the investment markets or elsewhere could really see how to
capitalize on this opportunity. That was until the 2011 Mercury Bomb
incident, when terrorists poured liquid mercury into Lake Meade, the
largest reservoir in the USA. It was enough to wipe out all water
supplies from the Lake for six months, and created a massive water
shortage which cost the US Federal Reserve $35 billion to overcome.
This single incident led to the US Government’s introduction of the
Water Act in 2012. This Act allowed Water firms to not only trade as
organisations, but also to trade their future water supplies based upon
each of their water purification plants, reservoirs and facilities. The
higher the government approval rating for the water facility, the
greater the liquidity of the stock in that facility.
The implications of this Act were not realised in full until the
investment markets picked up on the fact that they could now trade in
parts of companies, not just the companies themselves. As a result,
spread betting and exotic options markets appeared where traders would
invest in the likelihood of a firm’s tall buildings being impacted by
flood or earthquake, and even on a company’s key executives being
kidnapped or departing due to ill health.
Such investment classes were not approved by government departments
but, once firms realised how lucrative the potential returns could be,
the impact was soon felt globally with most investment markets creating
micro-stock alternative investment vehicles (AIVs) to trade in pieces
In addition, 'live' trading in the water markets had all become
automated through news algorithmics. For example, Lee had heard the
previous day of a news alert that a mini-Tsunami would hit San Diego at
10:12 PST that evening. Without even having to check his portfolio, his
systems had automatically moved his investments with exposure to
California water firms and micro-stocks to positions that reflected
other water traders on the network. Such activity was simple and
commonplace with the latest news algorithmics services on the network.
This is why trading in micro-AIVs was so key, as the level of
automation meant that micro-AIV stocks were the only asset classes for
many traders to leverage their returns.
Even with all of this activity, traders could still make a lot money
out of water, as water had become the world’s #1 trading commodity.
Water had become a scarce resource – even rarer than oil for many of
the Earth’s inhabitants. Governments now waged wars over water, and the
world’s equities and futures markets had worked out how to capitalize
upon the opportunities of this commodity through highly automated
Exotic options trading on the Water Commodities Exchange (WCE) became
one of the most liquid markets, literally, and Lee was known as the
world’s leading Water options trader. Even though the WCE was based in
London and Lee lived in Boston did not matter. But it was the reason
why Lee was getting up at 2:00 in the morning. Not because he wanted
to catch the opening of the markets as he would have done in the old
days – there is no opening or closing of markets, markets trade 24
hours – but because he wanted to catch WaterWorld, the daily news update on the dedicated Water Channel, Water.net, which aired daily from London 8:00 to 8:30 GMT.
Of course, he could preset his view machine to catch WaterWorld and
view it later on his watch or in his Personal Digital Space (PDS), but
then he would miss the opportunity to catch the trading liquidity
during the first half-hour after the programme’s ending. The WCE
literally spiked for an hour every day – from 8:00 until 9:00 GMT –
during WaterWorld, after which everyone’s positions were set
for the next 24 hours as the algo services and news algorithmics took
over. So, everyone watched WaterWorld if they were involved in the water commodities markets, whether it was 3:00 or 23:00 local time.
The full paper goes over 10 pages. If anyone wants a copy, just let me know.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...