A few weeks ago I participated in a roundtable breakfast on Protecting Financial Markets in the Age of the Cloud. The roundtable gathered together a group, - consisting primarily of financial experts, with a sprinkle of technologists like me, - to explore how to best regulate financial markets in our fast changing, highly interconnected, complex, digital world.
Several participants cited the sharp rise in volume and speed of high-frequency trading over the past decade as an example of a current practice that is potentially increasing volatility and systemic risk in financial markets. They mentioned the flash crash of May 6, 2010 as the kind of incident that is not well understood, and whose recurrence could compromise the stability and general trust needed for financial markets to function smoothly. At least one of the roundtable participants was convinced that another major event, similar to the global financial crisis of 2008 would inevitably take place in the next few years.
Toward the end of the roundtable, the moderator asked us to reflect on the kinds of controls needed to make financial systems more stable and less prone to another major crisis. Can you do so with incremental, evolutionary safeguards, or do you need major new regulations? Can the industry institute the needed safeguards on its own or do governments have to play a bigger role?
These are very complex and important questions for which there are no simple answers. Our answers often reflect where we stand in the conservative-liberal spectrum. My own point of view is shaped by my interests in complex engineering systems, in particular, in systems whose components are interconnected via digital networks; where software plays a major role in their overall design and operations; and, which involve people and information as well as technology.
Financial systems are an example of such complex engineering systems. Thus, I am hopeful that much of the research on the design and operation of such systems will shed light on how to better manage financial systems as well.