Way too Big to FaiL: The Day CapitAI-ism becomes Sentient
Why is everyone so worried about teenagers using AI to write their term papers while no one is talking about AI crashing the financial markets? If high school Pat gets an A they didnāt earn thatās one thing, but Megla Corp using AI to corner the stock market and crash the world economy, well that is quite another. I have no proof that large corporations are in a competition to build the perfect trader, the ultimate hedge fund manager, the killer quant, and the optimal analyst all rolled into one ultra-economist AI, but I know, we all know, in our greedy little capitalist hearts, itās true. This wanna-be hegemonic corporation will have unleashed an economic weapon that canāt be bargained with, canāt be reasoned with, doesnāt feel pity or remorse or fear, and absolutely will not stopā¦. EVER, until you are broke!
The legendary Hedge fund manager Kyle Reese aside, think about the implications of a trading bot that has even just a 2% advantage and how much money that can mean. Casino empires were built on games that have less advantage than that so you are crazy if you donāt think there is a race to build the ultimate TradeGPT. Everyone is looking for an edge because, in a land where money is king, he or she who owns a money printer owns the crown. Wall Street was an early adopter of computers and networks and they got so far out ahead of the regulators that they crashed the market on Black Monday in 1987 dropping the US market almost 25% in a day that sent reverberations around the world. Like the treaty obligations in Europe over 100 years ago, programs with trading rules sold shares it controlled when ABC was less than x which sparked the next condition and then the next until Austria-Hungary declares war on Serbia, Germany declares war on France, Britain declares war on Germany and there you have Cyber World War I as told by the Economic Historians of the future.
Internet chat rooms have been used for insider trading, manipulation, collusion, and outright scams since the early days of the technology and still are today. High-frequency trading became a thing because computers could recognize and act upon a spread for arbitrage or make news-based trades fractions of a second before the herd heard about it and therefore capitalize upon the fractional second head start. This battle intensified as firms sought faster network speeds and moved as physically close to the exchange computers as possible and bought the fastest fiber optic cable and tapped the internet as close to its backbone as possible to gain even the slightest smallest fraction of a second edge. This use of technology may or may not have caused the Flash Crash of 2010 and then again it may have contained it as the market plummeted and regained almost 10% in less than an hour. In response to this ātheyā put in ācircuit breakersā to shut down trading in order for everyone to take a beat.
Of course, AI is already on wall street and has been for some time. Even non-millionaires can sign up for one of many Robo-Advisors. These have been around for over a decade so you can only imagine the level of sophistication that the Hedge Funds, closed off from us unwashed masses, utilize. With the recent news filled with stories of ChatGPT and other large language models (LLMs), you can bet there are LLMs pointed toward data sets that someone thinks contains all the things that make stocks go up and down. It could be fed data on stocks going back over 100 years along with up-to-the-minute news, data on companies, and everything related to them on the internet since it was Arapnet. They are probably searching social media to see what each employee did over the weekend and which ones updated their resumes. They are no doubt tracking all the whales (large traders) as the moves they make have an impact on stocks and sometimes the market as a whole. Maybe the financial version of SkyNet monitors each and every person at every moment to know how the market will move from second to second. Maybe not.
Ok as you have probably guessed I am not a computer scientist but I do work a technology job so I know rebooting will fix the issue 90% of the time, I just donāt know the real reason why. Letās set aside the sentiment that the market is too noisy or humans are too irrational to predict and chalk that up to ego and assume that it is not if but when AI will conquer the market. Even the experts in the field canāt say with any certainty how all this will play out so letās look at some possible scenarios and think through how they could unfold.
āā¦you can bet there are LLMs pointed toward data sets that someone thinks contains all the things that make stocks go up and downā
The biggest determinant of outcome would seem to be not only how advanced the newest AI is but how well distributed it is. If one company develops an AI that is 50% better than the next best, that outcome is vastly different than 50% of companies having access to a model that is 5% better. AI doesnāt have to be sentient or malevolent to disrupt society in unforeseen ways both good and bad. That is why some technologist thought leaders are saying we should take this moment to pause and reflect but letās be honest, that isnāt going to happen.
Just to be clear, Iām not saying that this is how itās going to happen but I am saying we need to be discussing it. These scenarios are meant to be starting places to evoke thought and discussion.
Scenario 1 ā Economic Hegemon
Meglacorpās huge investment into AI pays off with a model that can predict the movement of individual stocks day over day with 61% accuracy. Meglacorp spreads these bets across all its hedge funds so as to draw as little attention as possible. Over the course of days, it starts racking up big returns and others start paying attention and buying the same stocks as the Meglacorpās hedge funds which makes them go up even more. This repeats in a short period of time Meglacorp and its hedge fund investors become (even more) ridiculously wealthy. Meglacorp wanting to protect its lead starts buying its top rivals and those it canāt buy it looks to destroy by crushing their investments.
In the short term, people buy up Meglacorp Stock and try to invest in their hedge funds. Their stock goes to the moon and they open more hedge funds to draw clients from their competitors and expand into other products to get as many assets under management (AUM) as possible and charge crazy fees because the returns are crazier still so they can. They of course immediately replicate this asap on every market in the world until they own the bulk of the planet. Soon after, Meglacorp eats all the markets and we live in a world dominated by one behemoth company that buys up all the significant technology companies and has a presence in every major industry under layers of holding companies. All hail Meglacorp, long profit Meglacorp.
āThis wanna-be hegemonic corporation will have unleashed an economic weapon that canāt be bargained with, canāt be reasoned with, doesnāt feel pity or remorse or fear, and absolutely will not stopā¦. EVER, until you are broke!ā
Scenario 2: Oligarchemon of Control
While AI continues to spread across Wall Street a handful of companies are in a tight competition to push the boundaries of AI with tons of money to throw at the challenge and the top people in the field employed and working hard at it. These companies and their AI leapfrog each other by the day with spectacular achievements and while the leader continuously changes depending on the day and the criteria, the collective group is miles ahead of the rest of the pack. One of these companies starts expanding their trading in the market and the others follow suit which starts a competition to grow their customer base so they have more funds to trade. Not only are they trading the market as we know it but as each increases their bets the influence of the other AI has to be factored in and suddenly these models start winning and their assets under management grow and they get better day by day and sometimes hour by hour. One day the world wakes up and the stock market is controlled by a handful of companies and the funds that they run.
Trading stocks is a zero-sum game so if these AI win that means companies, funds, AI, and ultimately people on the other side of these trades would lose. The sorta good news is that the losers were probably pretty wealthy to start with and also traders of specific company stocks who were probably betting on companies with an inflated value that was seen and then exploited by the AI trading algorithms. The better news is that investors who were diversified would possibly net out and so would many funds that people held assuming they didnāt panic and sell. How well most people would fare will depend on how soon they saw what was happening and moved their bets to an AI-run fund.
The more trading done by AI the less dramatic the bubbles and busts would become going forward and the less irrational the market would become until it became boring. Companies would be made to become efficient and focus on real innovations instead of hype. Fees could be dramatically reduced and entire layers of middlemen removed as pink slips would be printed in bulk to the brokers, traders, analysts, salespeople, and support staff not to mention all the layers of middle management and their big salaries and bonuses. The perpetually understaffed SEC could have AI ferret out even the smallest anomalies as they would not always be manipulation, but manipulation would almost always present as an anomaly.
ā..competition to build the perfect trader, the ultimate hedge fund manager, the killer quant, and the optimal analyst all rolled into one ultra-economist AIā
For the lucky investors who almost immediately saw the writing on the wall and moved their funds to the trading Oligarch funds, they would have had big gains that were lessened the later in the process the switch was made. The unlucky ones sat on their hands sticking with what they had or more commonly, oblivious to the financial coup that took place on Wall Street only to wake up one day to rivers of blood in the streets and slowly realize that some of it was theirs. Funds and trading desks run by humans or even inferior AI would not be able to compete. Thatās if all the Oligarchemon models worked well in the final period of intense competition for gains and customers. If even just one one failed they could collapse in the speed of a flash crash and wipe out people who put their eggs in that one basket.
This short period of intense growth could bring a huge transfer of wealth from those who were slow to react to those who could see what was coming and act. The bulk of people, not invested significantly, would only be affected by the aftermath of the carnage wrought on the companies many of them work for as the economy would enter a period of rebalancing. Public companies, instead of being beholden to greedy human stockholders, would be beholden to greedy AI traders that could see through CEO bullshit and make decisions based on the companies earning potential as the AI assessed it. It could be the next step in Capitalismās journey moving markets closer to true transparency and/or it could be a huge transfer of wealth (again) from the merely well-to-do and rich to the mega-rich and tech-savvy.
Of course, when you have an oligarchy in the market, things tend to stabilize as everyone makes good money, and price wars hurt everyone. The incentive to innovate also decreases as when you are holding the golden goose, why would you go messing with chickens? After the initial surge and once the oligarchemon owns most of the market and customers maybe things will level off but if one AI team gets aggressive and comes up with a sufficiently significant enough innovation things could devolve into scenario 1 with 1 company dominating. Things could go south too if one such innovation leads the AI to do something dumb enough to wipe out its portfolio, and its investorsā savings, on a big bet that loses.
Scenario 3: Super-Duper-Super-Power
Imagine a country where tech companies and financial service companies reside that starts to break away from the pack of other countries and starts sprinting down a path of accumulating the worldās wealth and resources. AI as a Service becomes essential as companies must learn to operate in a way that the AI traders see as a path toward maximum profitability if they want their stock price to rise. Of course, the shareholders will mostly either be AI or human proxies acting as the AI instructs so the Company leaders will have to seek and follow the advice of AI or hubristically think they can beat them and risk their jobs. Now stop imagining the country in question is the US. What if it is China? What if it is an ally like the UK or Canada?
Imagine that China unveils a hitherto hidden microchip fabrication plant where it is able to create the hardware pieces that it had previously had to buy from other countries. Imagine that China wins the AI race and decides they want to be the sole superpower. What better way to dethrone the seat of capitalism than to use the place of worship for the system, the exchanges to drain all of the marketsā wealth without needing to fire a single shot? If Chinese AI dominated the stock market until they owned majority stakes in many key US companies what could we do? What if they had them all relocate their HQs to Hong Kong or sign business deals heavily in favor of the Chinese? What would we do? Could we do anything before it was too late?
What if it is not an adversary but an ally and friend like our little sibling to the north, Canada, who is no AI slouch. Would a Canadian company with a superior AI not decide to try and make money off of it? Would they be any less ruthlessly capitalistic than a company mostly housed within our own border? Maybe they might say a stereotypical āsorryā or two but they would still bank the wins. What if a Canadian Hedge Fund Company suddenly owned a huge chunk of the S&P. What if it is a small group of Canadian companies, would that even matter? It suddenly seems like the country of origin matters less and that we would have AI-rich corporations suddenly be the puppet masters to a huge swath of our economy and likely the world economy. What would that look like?
Scenario 4: Everybody wins!
AI makes everything better and everyone rich and we all live happily ever after. The gains in stock market predictability are distributed fairly evenly as the technology spreads rapidly. Inefficiencies are eliminated from the system, waste is removed and profits are spread all around. Horrible companies go away and underperforming companies perform better. More jobs and companies are created than are lost. Abundance is everywhere and work gives way to pursuing passions and double and even triple rainbows become a daily norm. This is the outcome most of us would want and that is why I listed it last as the skeptic in me says there is always someone around who ruins good outcomes and that is why we canāt have nice things.
āā¦assume that it is not if but when AI will conquer the market.ā
What do we do?
So how do we defend ourselves? One thing seems pretty clear, AI is already embedded in Wall Street and the competition is on. We need to stay abreast of what is happening and if we are going to concentrate our eggs in one or a few baskets, we better make sure we are right. The good news is that in each of the scenarios from one company dominating, to a handful, to one county, to an even distribution of technology, the self-serving motivation is to make money.
While that may mean the obliteration of some companies, some investments, and some investors, at the end of the day for those profits to mean something and have value, the economy must not be obliterated.
In fact, the greedy AI needs companies and thus the economy to do well in order to prosper and that may well be what saves us all. The fictional character Gordon Gecko famously said āGreed is goodā, his AI doppelganger may well say āEnormous greed is enormously goodā. I donāt know if that is true a little or at all but this ride is going to be fast, scary, and anything and everything but boring.
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By the Author of- Platoās Dream: Crisis of the Employment Singularity
