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Complexity Is Not Free


In case you hadn't noticed, the world is getting more complex. And the complexity of the placing a trade for fund managers and other institutional investors seems to be growing exponentially.

No, duh, says Salim Ismail, founding executive director of Singularity University. That's an offspring of the fertile mind of Ray Kurzweil.

He's the guy who made huge advances in voice recognition, so folks who, for instance, could not type by hand, could type by spoken word.

He's also the guy who says the time will come when man and machine will merge. When it will be possible for you to store yourself as a digital being and live forever. That is the singularity.

In any case, Ismail on the first day of the 2012 Technology Leaders Forum of the Securities Industry and Financial Markets Association made the observation that "complexity is free.''

He was referring to the advancing practicalities of printing new objects, instead of manufacturing them. Now, objects of almost endless complexity can be printed out in plastic or metal. The detail costs nothing extra, unlike previous methodologies.

Indeed, he says, a house now can be printed in two-and-a-half days, using substances such as adobe.

But the question before financial markets on is: Just what is the cost of complexity?

Duncan Niederauer, the NYSE Euronext chief, testified before a House subcommittee on capital markets on market structure on orderly trading, in the days of nanosecond technology.

In most countries, there is one national exchange, he noted. In the U.S., there are 250 competing venues, ranging from exchanges to dark pools to alternative trading systems to electronic communication networks to the "internalization'' by broker-dealers of their order flow.

These days, he said, 30% of all equity trading occurs off exchange. More than 55 of trading in about 1,200 symbols occurs off-exchange. That's up 143% in just two years.

If Ismail is right, the finance industry is in the grip of an exponential growth in complexity, driven by the acceleration of the functionality of technology.

But, if Niederauer is right, what is happening is that only the "more toxic order flow" is reaching exchanges.

Which is the true cost of complexity.