The world is being connected; People, roads, railroads, appliances, cars, televisions, light bulbs, clothing, shoes, city streets, and just about everything else is “joining” the internet.

Possibilities expand exponentially as things join a network. Inputs and outputs increase. At some point, the noise… the potential connections… the models become overwhelmingly complex. And it is within that complexity and connectedness from which opportunity arises.

The stock market knows this reality very well. Billions of dollars change hands every day. People’s fortunes and futures are at stake. A cacophony of unstructured information, transactions, micro and macro analysis competes for attention and conspires to defy structure or a manageable common narrative. The creation of index funds was arguably in response to the overwhelming amount of information, and a resignation against the chance of actually beating the efficiencies of a vast and unevenly informed crowd.

For decades, the best traders, advisors, and money managers have finely crafted their trade. It is an industry that rewards the fittest arbitrage specialists, and extinguishes the efforts of the rest. Five years ago, more than 80% of traders lost money, and only 1 in 100 made money with any sort of predictability. But that was before the advance of the machines.

Today, machines are reading and scanning digital networks, digital newspapers, analyzing trades, macro trends, financial signals, and are executing trades and making decisions before a human can even process the information. In the time it takes the human to read a tweet, information has already been parsed, and thousands,or hundreds of thousands of dollars have already been made or lost.

It’s been estimated that over 80% of all stock market trades are being executed by high frequency trading algorithms. The algorithms are increasingly predatory. They learn from each other. They copy each other. They reverse engineer each other and then execute a counter strike to capture more value in a zero sum game.

The fundamentals of trading are the same, except:

1. The game has sped up tremendously

2. The data sources are exponentially greater

3. The competitors are faster, smarter, stronger

4. Automation has surpassed the capabilities of humans

5. When augmenting computer intelligence with human intelligence, the combination becomes unbeatable

What we see as a result of these new realities are the following:

  • Flash crashes (or errors in the algorithms)
  • Survival of the fittest (where algorithms and/or their traders are rendered obsolete)
  • Automated intelligence gathering (where machines are beginning to learn and respond on their own)
  • Agents are playing the game on behalf of humans broad direction.

So what does this have to do with your business? Everything. The pure transactional nature of the stock market gives us a view into where the world is going. It is one of the first and fastest industries that went almost entirely digital. It has taken a trajectory that many other industries and businesses are in the process of following, albeit more gradually.

My guess is that you might agree that at least the first three on the list above could also be said about your industry. For many B2C and E-Commerce companies, number 4 is at least true in some areas. The key point in number 5 is that humans are still vastly superior in complex analysis and problem solving than even the fastest and smartest machines. And this is where the opportunity lives for those who are able to move fast enough.

The risks are cautionary as well. Automation will inevitably lead to mistakes. With amplified speed and scale, the mistakes can be catastrophic. With ever narrowing feedback loops, the survival of specific technologies, strategies, and entire organizations will rise and fall in ever narrowing windows. Machine learning, deep learning, and artificial intelligence will become more common place. Robots, drones, virtual reality give us a glimpse at how new agents will be operating our behalf, not just in the digital, but also in the physical world as well.

MORE READING: Speed Kills and Micro Everything

One vertical that is already mirroring the trajectory of financial markets is ad tech, where algorithms are increasingly optimized and automatically executed. We’re seeing this extend into other sectors, as well, especially media consumption. When digital behaviors are tracked, more relevant content is served up based on complex big data algorithms.

MORE READING: The Truly Networked World We Still Can’t Quite Grasp

As more of our world gets connected, it allows each connected node (people and things) to interact in new ways. It also provides unprecedented visibility to what’s happening, and opens up new opportunities for value creation.

Those who have the most information are armed with the most raw material. But, that is just the starting point.

Building an infrastructure that is able to gather, analyze, and execute will be the key differentiator for many organizations. Buyers and sellers in the financial markets have created robust algorithms to help optimize the best point to sell or buy a commodity, based on complex rules and a myriad of data points.

The reality is that most organizations today are still wrestling with automating a portion of their marketing activities, and/or elements of their procurement or supply chain operations. For top performers, these functions will become increasingly efficient and effective. In a connected world that succumbs to power laws, the top few capture nearly all of the gains.

Even in industries that are not purely transactional, the parallels exist. An offer to buy, or sell, is still an offer. Substitute the buy/sell offer of the financial markets with an offer to click, download, read, or engage in a B2B environment, and the principles remain. In a distracted and transient world, our goal as an organization is to present something meaningful and relevant to the right stakeholder at the right time.

Building the Future

As you continue to pioneer innovation for your organization, key questions might be:

What is currently not connected that should be connected?
What might happen if you were to connect the disconnected?
Which data do we already have that should be merged and analyzed to provide better insights?
Which functions can we automate now and in the future?
How can you create a better experience by predicting customer behavior?
And of course, what risks might we encounter along the way?

This post is brought to you by InnovateThink and Cisco.

Comments

  1. Neal Taparia says

    Hey Brian,

    Very interesting article and I agree there is a lot to be learned from the financial markets. In addition to the automation trend, I think there is something to be learned from the irrationality of the financial markets. Specifically, I think there’s value in trying to predict when customers will act irrationally.

    What are your thoughts on predicting the irrationality of customers?

    Cheers,
    Neal

    • says

      Neal,

      Thanks for reading and taking the time to share.

      Good idea. I think that customers (and people) are Predictably Irrational. :)

      But, are the markets truly irrational? Or, at least are they becoming less so? We know that people are irrational, but what about algorithms? Can irrationality be programmed away? Or does it introduce more irrationality into the market?

  2. Thomas Wieberneit says

    Hi Brian,

    interesting indeed, although I do not really see the capital markets as a good example. Yes, they are predatory and no, they are not predictable. The successful trader this year is almost certainly the loser next year. This is probably not because the trader lost it in between or got surpassed in knowledge and ability.

    Apart from the tech wave I reckon that there is a very good deal of plain ole luck and, sorry, conning in that business, the latter as currently being evidenced by an increasing number of players – institutional as individual – not only facing court but also sentences.

    But to some extent I agree: A key ingredient to being successful today is having (the right) information and connecting the dots … fast (aka making it actionable and act on it).

    Thanks for the post!

    Cheers
    Thomas

    • says

      Thomas,

      Thank you for taking the time to read and comment. I’m not sure of the merit or accuracy of simplifying financial markets to luck and criminal activity.

      The main thing is attempting to understand the role and trajectory that algorithms and automation are playing and wrestling to grasp and imagine the opportunities and challenges that those dynamics will bring to each industry.

      Best regards,
      Brian

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