Social Friction

One of the general trends in financial systems these days is the removal of friction.

It wasn’t all that long ago that stocks were traded by waving pieces of papers in the faces of market makers (does anybody else remember the game Pit?). In fact, some futures markets still work that way. The action could be very fast, too fast to follow for the uninitiated, but it couldn’t run faster than human speed. Now stocks are traded electronically, and the pace can be much much faster than any human can follow. Computer programs trade stock against each other. This removes a lot of friction.

Without friction, you can slide a long way. So rather than interfere at the level of the trade, markets interfere at a higher level: if a stock price changes too far too fast, the market automatically imposes a brief moratorium on trades in that stock, for, say two hours. This gives humans a chance to get back into the loop to make sure that what is happening is what they intend.

I think this is an interesting example of using a high level control to permit the removal of low level controls. It would be nice if it were possible to apply this technique to, say, e-mail rumors: “this message has been sent to thousands of people in the last five minutes; let’s automatically attach a link to Snopes.”

Frank Herbert is justly famous for Dune, but I’ve always been very fond of his book Whipping Star. In that book the protagonist works for the Bureau of Sabotage, an official government agency whose job is to slow down other government agencies, to throw sand into the wheels of justice, to make sure that human considerations are taken into account. I’ve always thought that was a very perceptive idea. The sequel to Whipping Star, The Dosadi Experiment, I consider to be just as good as Dune.