Monday, September 08, 2008

Event Processing Example - Turbulent Markets

Can Real-Time Profit and Loss tame the turbulent markets? ask Bob Giffords (independent analyst) and Mark Palmer (Streambase).

The simple answer is No. Turbulence is a complex systems phenomenon. (Complex event processing is not primarily about complex systems, although some of the advocates of complex event processing might benefit from knowing a bit more about complex systems.)

If we want to know how turbulence can be tamed, we need to understand the root causes of turbulence, in terms of the non-linear effects of feedback loops. This is properly a job for market regulators. For example, central banks may try to reduce volatility in the money supply, and have sophisticated economic models to support their analysis. But the recent history of market regulation is a sorry one. Some analysts have argued that regulations such as Basel2 actually amplify volatility and turbulence in the system, because they force individual banks to execute transactions in response to market movements in order to maintain key ratios.

So it would be interesting to see an application of complex event processing in regulating a complex system. But this is not what the white paper is about. Perhaps wisely, it doesn't actually talk about taming the markets, merely about riding (=profiting from) the markets.

If some players have better tools, including CEP systems, this may give them an advantage in a competitive turbulent market. But this raises three important questions at the ecosystem level,

1. How does the use of these tools affect the market itself? Does the level of turbulence increase or decrease?

2. If the players with the best tools are those that profit the most from turbulence, then they possibly have an interest in promoting increased turbulence, even if this is damaging to everyone else.

3. What would happen to the ecosystem if these tools become commonplace? Would the advantages of these tools be reduced if everyone else had them?

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