April 22, 2014 | 6
There’s been a lot of chatter this month about high frequency trading, due in large part to the release of Michael Lewis’s latest book, Flash Boys: A Wall Street Revolt. We all love a story of heroes and villains, good versus evil: we love the emotion of it, and most of all we love that we can punish the bad guys (whether in our minds or in real life) and then set the story aside in a nice tidy box.
These heroic tales are compelling, but they only tell a small part of the story. In research for my own book, The Nature of Investing: Resilient Investment Strategies through Biomimicry, released today, I examined high frequency trading (HFT) through the lens of biological ecosystems, asking the question, “When is growth healthy, and when is it dangerous?”
The main idea behind healthy growth is a simple one: growth needs to be supported by other parts of the system, whether that system is within a single organism or part of a broader landscape. Bees do not rush to build the biggest hive possible; they use modular construction, building in sync with the size and needs of the colony. A tree does not shoot out new limbs at random; they are balanced by growth in the structural and nutritional support systems of the trunk, roots and soil. As the adage says, “Trees do not grow to the sky,” and it’s not because they lack ambition.
In fact, when we see unchecked growth in natural systems, it is usually sign of disease or invasive disruption.
When we look at high frequency trading through this biological lens, its clear that growth in HFT was never aligned with development in the surrounding environment. This one segment of the trading world grew from 21 percent of market volume to 61 percent in just a few short years. At the same time, the rest of the market hardly grew at all. Almost all elements of the surrounding “ecosystem” were out of sync. The supply lines and connective tissue – technologies of HFT trading partners – were woefully disconnected. The nutrient supply – securities available to be traded in this manner – was not growing either. If it had been, we would have seen market volume growth well above and beyond HFT’s influence. On top of that, the regulatory environment, which sometimes acts as a curb to growth, actually encouraged it in this case, through a series of complex rules designed to promote market liquidity.
It doesn’t matter if its high frequency trading, tulip bulbs or turnips; when growth of any organism is out of sync with the development of its broader ecosystem, it’s inherently a fragile situation. Almost every endeavor offers the chance to maximize short-term growth in an inefficient, wasteful manner. But every good businessperson recognizes that this approach is just hurting her own enterprise. A much more interesting question is, can growth be achieved in a way that is not just sustainable, but regenerative? This is perhaps the biggest question for the world economies, too: can we fuel healthy standards of living for all, in a way that uses fewer physical resources, instead of more? Asking “how” rather than “how much” is essential.
Contrast the HFT example with one of healthier growth, a company like Google. As with any company, you may or may not be a fan of everything that’s happening at Google, but let’s focus specifically on the conditions in place during the early days of the company’s existence. Unlike HFT, the backdrop that supported Google’s development was robust. The supply lines of Internet connectivity were improving rapidly, the nutrients of online information sources were dramatically increasing and the demand for Google’s search function was strong and rising. Here we see an entire ecosystem that was growing and developing quickly, and Google was an integrated part of it, not a disassociated anomaly.
This framework for thinking about development has implications way beyond the current HFT debates. Growth is an essential question for all investors, and discerning healthy growth from unhealthy growth is vital for our entire society. Biology and finance should not be in different buildings, at opposite ends of the campus, nor should they rest in different parts of our minds, where business sits in one box and science in another. Nature provides our best example of adaptive, resilient, regenerative systems. We have 3.8 billion years of wisdom to draw upon. In investment circles, we’d call that a compelling track record. We have the opportunity to embrace nature’s wisdom instead of harvesting nature’s stuff.
Using the fundamental principles outlined in biomimicry, I have begun to transform my own investment process, and these same principles have the power to transform our entire financial system, to re-root it in service and connection, as originally intended.
As a society, we can resist the tendency to turn our biggest questions into yes/no, good/bad shouting matches. We can bring the curiosity and rigor of scientific inquiry into our economic and social spheres. This re-integration is desperately needed, and is our best chance for truly, deeply profitable endeavors.