Counteracting Our Obsession with Speed

In the quest to get as close as possible to the speed of light for faster decision making, it appears some companies are moving too fast and thus making very costly mistakes. When windows of time are compressed to near zero, there’s no recovery time for critical errors.  In fact, for some decisions (especially those of a strategic nature) it’s much better to take it slow.

Courtesy of Flickr. By Theseanster93

In baseball, scouts love to find pitchers that can throw “the heater”.  Prospects that can throw near 100 mph a few times a game are coveted over those who can rarely top 90.  The mantra for pitchers now is; “throw it faster and see if hitters can keep up”.

However, there’s a renewed interest in knuckleballers, or those pitchers who throw a pitch with little to no spin. For these pitchers, the ball is supposed to “dance” on its way to home plate at speeds of 60-70 miles per hour. For baseball hitters, trying to track down a dancing knuckleball is extremely tough. It’s hard to track the lively movement of the knuckleball, much less adjust to low speed at which they’re thrown.

Why the revived interest in knuckleball pitchers? Sports Illustrated writer Phil Taylor says; “(In baseball) we need the knuckleball to help counteract the obsession with speed, to prove there still is a place for nuance and skill.”

Phil Taylor has it exactly right –in baseball and in the business world.

Our world is obsessed with speed. Faster food, hurry up offenses in football, faster computers, and even faster war-making. As I have detailed before, it’s everything—faster.

But conversely, sometimes moving too fast is dangerous. There are some decisions that should not be made too quickly, especially those that could benefit from more data collection, or decisions where there is ambiguity and complexity. United States President Barack Obama mentioned in a Vanity Fair article; “Nothing comes to my desk that is perfectly solvable…so you wind up dealing with probabilities, and any given decision you make you’ll wind up with 30-40% chance that it isn’t going to work.”

Even when speed is deemed a competitive advantage, sometimes faster isn’t better. For example, Knight Capital Group lost $440 million dollars when a “technology malfunction” launched erroneous trades on their behalf.  Trading at near the speed of light, there simply wasn’t enough time to recover from the initial errors leaving Knight with nearly a $500 million loss in the span of just 45 minutes.

The need for speed comes at a price of compressed decision making windows and non-recoverability for critical errors. Worse, when errors from a few players cascade through complex systems, the feedback effects can severely damage all participants in the ecosystem. It’s as if the butterfly flapping its wings really does bring about category four hurricanes.

Not every decision needs to be made faster. There will always be a place for decisions made with “skill and nuance”, where it’s important to slow down, see the bigger picture, and adjust our swing and timing for the occasional erratic knuckleball thrown our way

Everything – But Faster!

Speed might not be the only way to win in the marketplace, but it sure does help. Companies are discovering that the element of speed—in decision making, delivering products and services, and communicating is one of the few bastions of competitive advantage still remaining.

Zero latency is the process of removing/reducing the time between an event and action. Those companies that can react and respond to changing market conditions faster than competitors (in a value creating manner) usually end up the first to the lunch table.

Image courtesy of Flickr. the prodigal untitled13.

Amazon is a great case study of a company pursuing zero latency wherever possible.

Take for example Amazon’s initiative to roll out new warehouses on a global basis to compete with retailers. Currently on Amazon.com, when a customer orders a product they have shipping options including overnight delivery. However, if new warehouses are closer to customers, it’s feasible for Amazon to offer same-day shipping (by 4pm).  This of course will put pressure on brick and mortar retailers that currently have the advantage of “get it right now”.

Amazon has also worked out this “time to value” concept with cloud computing solutions. In the past, if a particular company wanted to acquire hardware/software solutions, it was necessary to negotiate with vendors, sign contracts, and get products shipped, installed and turned on. Such a process could take anywhere from two weeks to two months or more.  With cloud computing, it’s now a lot easier to acquire similar capabilities from Amazon Web Services with just a credit card and a checkbox for the customer agreement for use of services.  With cloud computing, the time between event (the need for IT solutions) and action (gaining IT solutions) is down from weeks to minutes.

High frequency trading is another area where speed equals advantage. With this mode of trading, the key for hedge funds and investment banks is to co-locate servers at stock exchanges to reduce the roundtrip time needed to complete an equity trade. Now traders are competing with faster machines, better algorithms and faster pipes into stock exchanges. In a field where trades are made in microseconds, those who can trade faster than others gain significant advantage to the tune of millions of dollars.

Of course, there’s also a downside to speed.  As business processes are cut and paste to reduce steps, and decisions are made faster and faster (nearing the speed of light) it’s much easier to make mistakes. And when mistakes are made (see Knight Capital), there is little to no time to correct them.

Speed wins, but there’s definitely a careful balance between winning (too) fast and losing slow. The key for each business is to find that balance and discover areas where customer needs aren’t being met, then work to reduce the time between event and value to as close to zero as possible.

Of Baby Black Swans and the Race to Zero

Defined as extreme events with high impact, Black Swans are infrequent occurrences that pack a punch (i.e. in financial markets the 2008 crisis, or 2010 flash crash). However a new study shows as the combination of machine trading and speed intertwine, these extreme events are occurring more often than previously imagined.  As markets continue to connect and participants become linked, each extreme bounce and/or collision may slowly break the system.

Nassim Nicholas Taleb is the person most responsible for burning the concept of low probability, high impact events into the minds of global business executives.  Coining the term “Black Swans” as the name for extreme outliers with devastating consequences, Taleb has put executives on notice that they need more built-in redundancy and should incorporate slack in business processes to cushion against failure.

However as technology proliferates and advances thus speeding processes, it appears humans are increasingly removed from decision making.  Thus ensuring a little slack in the system may not be enough to protect from system meltdown.

Take for example a complex “system” such as global financial markets.  In an effort to gain competitive advantage, computer scientists, quants, and software programmers are building machines that scan data streams, analyze, and decide trading strategies in micro-seconds.  These individuals (sometimes hedge fund managers) or corporations (such as larger investment banks) are shrinking the window for decision making down to levels where humans cannot react fast enough—microseconds today and nanoseconds in the future.

Trading equities is now a technological “arms race”, where companies compete buying and selling at near light speed. And while the concept of using speed for competitive advantage doesn’t sound like such a bad idea, there are also ramifications for a race to zero.

The first issue with this trading arms race is exclusion of participants who cannot afford the requisite technology.  Just as it takes nearly a billion dollars to win a US election thus ensuring few can join the fray, it takes multi-millions to build and co-locate ultra-fast computerized trading platforms. A second issue is that as trading nears the speed of light, there is ultimately less and less slack in the system to correct trading errors. And since financial markets are tightly coupled, this means that one single error in a fragile system can cascade with cataclysmic results.

Trading at near light speed – in an already fragile and tightly coupled system—is driving more extreme events, which appear to be fracturing global markets. And contrary to common knowledge, these events aren’t just happening once every two to three years.

A team of physicists, system engineers, and software programmers recently published a paper suggesting that abrupt “events” are occurring in the financial markets much more than previously thought. In fact, over the years 2006-11, the authors report a total of 18,520 spikes in stock movements—or extreme events (I’ll call them baby black swans) that arguably should have low probability of occurring according to normal distribution statistical models.

The aforementioned study notes; “There is far greater tendency for these financial fractures to occur, within a given duration time window, as we move to smaller timescales.” Meaning that in financial markets, as faster computers slice decision making windows down to nanoseconds, we should expect more volatility.  Moreover, if a given system is not designed to handle extreme volatility, there is a high probability of fissures and potential for total system breakdown.

In 2010’s Flash Crash, the US stock market plunged 1000 points in nine minutes and then regained those losses just as fast.  Never before had market participants seen thousand point swings within a ten minute timeframe. If the authors in the study cited in this article are correct, this kind of extreme volatility is only the beginning.

Questions:

  • Is this “race to zero” latency risky, or is this much ado about nothing?
  • Speed is a competitive advantage. Do you see a similar “race to zero” in decision making processes in other industries?

Unintended Consequences of Combining Speed with Technology

Technology is often hailed as innovation vehicle, productivity booster, and enabler of a higher standard of living for all global citizens. However, the field of finance provides an interesting backdrop for what happens when an industry is pushed to its technological limits in the pursuit of automation and speed.

Since advent of the telegraph, and all the way until early 1970s, stock prices were displayed on a ticker tape printed in near real time.  The ticker tape (via telegraph technology) was a drastic improvement in delivery of information, since brokers could gain stock prices with only a 15-20 minute delay from original quotation.

Setting the dial now to the year 2011, we now see super computers trading stocks—not with humans—but, with other super computers. Forget delays in minutes or seconds, today’s super computers trade in microseconds and are increasingly “co-located” near stock exchange servers to reduce the roundtrip time for electrons passing through networks. In fact, on most trading floors, human brokers are obsolete as algorithms are now programmed with decision logic to make financial instrument trades at near light speed.

We’ve come a long way since the decades of ticker tape, says Andrew Lo, professor at Massachusetts Institute of Technology (MIT). At a recent conference Professor Lo mentioned while technology has opened markets to the masses (i.e. day-trading platforms) and reduced price spreads, there are also downsides to automation and speed.

First, he says, there is the removal of the human element in decision making. As super computers trade with each other in near light speed, there are smaller and smaller windows of latency (between event and action) and therefore fewer opportunities for human intervention to correct activities of rogue algorithms or accidental “fat finger” trades.

Second, with fiber optic networks spanning ocean floors and super computers connecting global investors and markets, we’ve essentially taken a fragile system based on leverage and made it more complex. Automating and adding speed to an already “fragile” system generally isn’t a recipe for success (i.e. the May 6, 2010 Flash Crash).

Based on these trends, it’s easy to imagine a world where financial networks will intensify in complexity, capital will zip across the globe even faster, and relationships between market participants will increasingly grow more interconnected. Where loose correlations once existed between participants and events, markets will soon move in lockstep in a tightly coupled system.

To be sure, the confluence of technology and finance has been a boon to society in many respects. However, as Lo says, there are “unintended consequences” in the application of the most advanced and fastest technologies to an already fragile system.  Whereas the buffer of “time” to fix mistakes before or even as they occur once existed, now we’re left to clean up the mess after disaster strikes.

In addition, as markets become more tightly coupled and complex, the butterfly effect is more pronounced where the strangest and smallest event in a far away locale can potentially cause a global market meltdown.

The Zero Latency Future is Now

Today’s advanced technology brings us virtual broadband autobahns that move data across the globe with speed and precision. In an attempt to capitalize on fast-moving data, some companies are using sophisticated applications and compute power to make decisions faster than competitors. However, when machines move millions of times faster than humans, there are some implications for the decisions made by marketing professionals.

A previous column “Is the Speed of Decision Making Accelerating?” cited how a century ago, managers could take weeks or days to make important decisions. That’s because before the advent of the telephone, it would take a substantial amount of time for information to travel by courier. Fast forward to the 21st century, most executives now have a mobile device and can be reached at a moment’s notice.

Our global society is moving towards a zero latency world, where the time between decision and action is drastically reduced. And we need to look no further than Wall Street’s high frequency traders for evidence.

John Plender of the Financial Times recently defined high frequency trading (HFT) as a “type of computerized dealing (that) exploits the millisecond gap between news events and their impact on markets … such trading has expanded rapidly to the point where 60-70% of the trading volume is in U.S. equities. Much of this volume is conducted by a very small number of companies.”

So what’s wrong with HFT? Plender cites potential problems, such as the “ability (for high-frequency traders) to see orders before they are public” and the propensity for high-frequency traders to co-locate servers on the floor of stock exchanges for faster trading (something not available to the average investor). In addition, the race is on where the winner in high-frequency trading can close trades as fast as 250 microseconds—faster than you can blink your eye!

The speed of decision-making is accelerating. In HFT, the trend is unmistakable. Machines are trading with and against each other. They’re moving ahead of individual investors, leaving day traders in the dust. And as a Financial Times article notes, speed isn’t just confined to Wall Street:  “Technology has changed many other big markets around the world and tied them more closely together … Such changes has created winners and losers.”

For marketers, the implications of zero latency are clear. For example, did you know that “robots” are purported to perform text mining on press releases when they hit the wire? With analysis completed in microseconds, advanced algorithms then execute trades based on what they’ve learned. Your company’s equity price could go up or down in seconds, based on the words in your press release!

In a zero latency world, what marketers (and other employees) say, write, tweet, and announce can all be used as fodder by the machines to either raise equity prices or destroy shareholder value. Our ability to react and “fix” our mistakes before they are noticed is greatly diminished. All it takes is a bad press release, poorly written whitepaper or negative analyst report.

And it’s not just PR. To borrow a phrase from Thomas Davenport, companies are now “Competing on Analytics.” Marketers must understand that they are now engaged in an arms race with competitors mining their own (and third-party) data for insights—increasingly by the hour and minute, and then taking action to better connect with customers. Companies without these capabilities will increasingly face mammoth disadvantage.

Zero latency decision-making isn’t the future. It’s now. Are you ready?