Algorithmic Terraforming

The Rise of SkyNet: The Algorithmization Of Finance Part III

New to the Sorcerer’s Apprentice series? Start with our foundational posts on Hyperreality and the Financial Matrix for essential context, or explore the full Table Of Contents.

Originally published privately on January 13, 2021. Updated, revised, and expanded for public release on October 17, 2024.

Imagine a world where AI weaves the fabric of commerce, spinning prices from the threads of data as if on a cosmic loom, rendering human concepts of “expensive” and “cheap” as archaic as carrier pigeons in an age of satellite communication. Here, prices exist as mere numerical hallucinations from the digital dreamscape of ChatGPT: abstract ethereal digits untethered from reality. Part I introduced these HyperPrices through a thought experiment set in an imaginary Costco. Part II thrust us into the unsettling reality of HyperPrices in our own world—from a $24 million Amazon book to a chaotic penny-pricing debacle.

However, these extreme cases merely hint at a more profound truth: HyperPrices permeate our entire economic landscape. Beyond the sensational outliers lies a subtler, yet far more pervasive manifestation of HyperPrices that emerges from the intricate interplay among algorithms themselves, as well as their interactions with humans—as seen in examples such as Amazon's “Project Nessie” and RealPage’s rental pricing software. The tendrils of algorithmic pricing have infiltrated virtually every corner of our economy—from e-commerce to online advertising to real estate to the asset markets—and are increasingly warping the fabric of the price system itself.

Like Mickey Mouse enchanting brooms in the Sorcerer's Apprentice, we’ve conjured forces that operate beyond our full control or comprehension—and unleashed them in the heart of our financial markets and economy. While the user interface maintains a façade of familiarity, these forces have fundamentally rewritten the economy’s operating system, giving birth to the Financial Matrix—a system in which the prices flashing across our screens represent...what, exactly?

Ten Milestones On The Road To Hyperreality: Contents
1.         The Metamorphosis Of Money
2.         Keynes' Kaleidoscope
3.         Central Banks’ Money Printer Go BRRRR
4.         Silicon Shadows
5.         The Rise of Skynet <== YOU ARE HERE
6.         The Institutionalization Of Finance
7.         The Symbolic Alchemy Of Risk
8.         “We’re All Quants Now”
9.         Social Media & “The Ecstasy Of Communication”
10.       The Consumerification of Finance

This Is Water: Swimming In An Algorithmic Undertoe

While the $24 million fly genetics book may elicit amusement, and few will lament advertisers being overcharged, algorithmic behavior takes on a far more serious tone in higher-stakes arenas.

In the heart of the global economy, a silent revolution has unfolded—one that originated with and evolved in tandem with finance's digitization, which in turn enabled and accelerated algorithmic trading. In today's markets, machines dominate—executing trades at speeds and volumes that human traders can neither comprehend nor match:

Algorithmic Terraforming

Source: Michael Najjar, high altitude—financial markets between reality and simulation

Skynet’s trading dominance is driving what Kevin Slavin (formerly of MIT’s Media Lab) termed “terraforming”—or perhaps more aptly, algoforming: the reconfiguration of the real world to mirror algorithmic imperatives. This concept finds vivid illustration in Michael Najjar’s artwork (above), which digitally reshaped the terrain of a (real) mountain by algorithmically re-mapping it to mirror the (virtual) data mountains of world stock market indices over recent decades—the mountain’s apex marks the peak preceding the 2008 Crisis.

For those intrigued by the intersection of art and algorithms, the following videos documenting the creation of Najjar's artwork offer a fascinating glimpse into his process (enable closed captioning for English subtitles):

Najjar’s art evokes Baudrillard’s retelling of Borges’ fable, in which cartographers of a powerful Empire created a map of its territories so intricately detailed that it became indistinguishable from the Empire itself. As the actual Empire collapsed, its citizens unwittingly began to inhabit the symbolic abstraction that they themselves had forged. The map became so vividly real to them that they entirely forgot the crumbling Empire beyond its boundaries. They exchanged the real for mere symbols of the real—yet all of their actions remained constrained to the map, rather than the real territory it once represented.

The Financial Matrix: Welcome To The Machine

Similarly, we investors now find ourselves inhabiting just such a meticulously constructed map—the Financial Matrix. We too have become so transfixed by the virtualized symbols and representations flashing on our screens that we have lost sight of and neglected the real-world substance that these symbols were intended to represent. We have become so convinced that “the medium IS the message” that we have forgotten to seek and tend to the meaning that the message was originally supposed to convey in the first place. Stock prices, yield curves, and economic indicators like CPI and GDP have become our reality, often divorced from the human activities they purport to measure.

Our digital maps aren’t merely replacing our perception of reality: they are altering—and sometimes supplanting—the territory itself. Our Sorcerer’s Brooms have taken on a life of their own, developing internal logics and dynamics that can—and frequently do—diverge from and reshape the underlying realities they were originally meant to represent. Our world increasingly resembles both Najjar’s algorithmic mountains and the dystopian future of Snow Crash; the map and the territory are no longer merely indistinguishable as in Borges’ fable—the virtual and the real actively converge in a constant feedback loop, each molding and being molded by the other.

To more fully grasp the profound implications on our financial landscape, we must turn to the prescient insights of Kevin Slavin himself. His brilliant speeches—delivered over a decade ago—have proven remarkably prophetic, especially in light of recent AI advances. Though not an economist or investor by trade, Slavin decoded a critical element of our Financial Matrix. His work laid the foundation for our deeper economic analysis, enabling us to complete his pioneering vision of algorithmic influence.

While we’ll explore and build upon some of his key insights here and in future chapters, Slavin’s expert storytelling makes his full speech worth experiencing firsthand:

Wall Street’s Silicon Makeover: HFTs Reshape Manhattan

Slavin’s observations on the physical manifestations of algorithmic finance are particularly striking and bring our abstract discussion into sharp, tangible relief. He points to the transformation of urban spaces—algoforming—as a direct result of the ascendency of high-frequency trading.

A carrier hotel—a massive data center in downtown Manhattan that houses 45,000 square feet of server space for 130 network providers—has catalyzed a peculiar phenomenon: nearby buildings are being gutted and repurposed to accommodate trading servers for Wall Street firms. These companies radically alter physical structures for the sake of nanosecond advantages in transaction speeds, gained through physical proximity to the data hub. Our urban environments are being reshaped in order to extract wealth from the Financial Matrix. The result is a hyperreal reconfiguration of our earth, driven by the insatiable appetite of algorithmic trading:

New York City is being optimised to run like a motherboard…It’s being smoothed into the performance characteristics of a microchip and you — all of you — are just loitering; because whatever it is you’re doing in that valuable space couldn’t possibly be as valuable as what a computer can do in that same office space.

Manifest Destiny: HFTs’ Terraforming Trench Between NYC and Chicago

Slavin describes an even more dramatic alteration of the landscape and algorithmic “manifest destiny”:

But if you zoom out…you would see an 825-mile trench between New York City and Chicago. It’s been built over the last few years by a company called Spread Networks. This is a fiber optic cable that was laid between those two cities to just be able to traffic one signal 37 times faster than you can click a mouse, just for these algorithms...And when you think about this, that we’re running through the United States with dynamite and rock saws so that an algorithm can close the deal three microseconds faster, all for a communications framework that no human will ever know. That’s a kind of manifest destiny.

Slavin’s work serves as a gateway to an even more profound transformation occurring in our economic landscape. While the physical manifestations of algorithmic influence are striking, their impact on our financial systems and markets runs far deeper—and often unseen.

When AI Plays Monopoly: Skynet’s Price Tags

Building upon Slavin’s illustration of algorithmic "manifest destiny," we now turn our attention to a more pervasive and consequential realm of algorithmic dominance. Algorithms have not only metaphorically reshaped the countours of our physical landscape, but have directly infiltrated our investment portfolios, pensions, and society at large via HyperPrices. While debates over algorithmic trading in finance have raged for fifteen years—with professionals and pundits alike arguing its merits and perils—we fear that both camps are squabbling over curtain colors while the house burns down around them.

Our concern runs far deeper, probing an aspect of algorithmic dominance that has—until now—escaped scrutiny altogether. Rather than rehashing well-worn arguments about efficiency, liquidity, front-running, market manipulation, or fairness, we focus on a more fundamental issue—Skynet’s impact on a cornerstone of our society: the algorithms are terraforming the price system itself.

Up Next:

Do HFT Algos Dream of Digital Dividends?