Web 2.0 Summit: Wall Street Becomes One Big Social Network

Today's "High Order Bit" talk from venture capitalist and "Infectious Greed" blogger Paul Kedrosky focused on the ways in which financial markets are coming more and more to resemble social networks. That leads to a pretty obvious question: Whom does increasing connectivity, correlation, and transparency in financial markets really benefit?In 10 rapid-fire minutes Kedrosky went through an array of Web 2.0-like applications and sites for financial trading of all kinds, including TradeStation, where you can create and test virtually any trading strategy; WeatherBill (founded by Google alumnus David Friedberg, appearing later today on the "Google Alumni" panel), which lets you take out futures contracts based on the weather in a given location; Swift Trade, a Toronto trading platform that lets you literally play with the house's money; and so on.

Kernel quote from Kedrosky: "Stock markets are social networks," and they're getting more so all the time as more and more once-proprietary information finds its way onto the Web and esoteric, once-exclusive trading strategies become available to your basic lone day-trader in his basement with a broadband connection.

All of these developments are being fueled by technological transformations at the heart of the network, which I chronicled in my feature, "Wall Street's Quest To Process Data At The Speed Of Light."

This all sounds great, and to the degree that it means the passing of the heyday of the Master of the Universe hedge-fund manager like Victor Niederhoffer (profiled in a riveting New Yorker feature by John Cassidy), it's probably a good thing for the wider economy. Niederhoffer, who lost his shirt in the 1998 Asian financial crisis only to rebuild his fortune, lost it all over again in August's subprime meltdown.

Every market trend provokes its opposite, however, and Kedrosky pointed out that traditional Wall Street doesn't particularly like transparency, as demonstrated by the increase in the number of "dark pools" or anonymous collections of traders using similar strategies. And the ultra-secretive hedge funds aren't exactly withering away, either.

What's more, all of this social-network style correlating and interconnecting has a downside, as well, as shown in last summer's turmoil that felled Victor Niederhoffer's flagship fund, Matador and many of the other high-powered quantitative traders, known as "quants." In a long, fascinating piece in the new issue of MIT Technology Review, Bryant Urstadt explores the world of the quants, and observes that they are in some ways responsible for their own troubles in recent months: "quants were indirectly responsible for the boom in housing loans offered to shaky candidates."

Cassidy's story on Niederhoffer is called "The Blow-Up Artist." Urstadt's story is titled "The Blow Up." Social networks, transparency, and correlations won't change a basic fact: Wall Street will always be prone to blow-ups.