March 10, 2016
Recently we had a series of presentations from MMS 2nd Semester students on Digital Transformation as a part of the preparation for the Dandekar Trophy. Though the students who were gunning for a selection did a marvelous job only a select few could be sent to represent AIMS. There was very little difference between the contestants and those who were not selected could not make the grade because it was just not their day. Like when a batsmen gets out at 99.
During the process there were several insights that were drawn. Digital transformation has changed the Banking Industry, Retailing, eCommerce driven businesses, Telecom infrastructure and Capital Markets too.
Capital markets are turning more technological than financial, with machines taking over. In India, over 30% of trading in the markets is Algo trading. In the United States, this is even higher at almost 70%. Algorithmic trading is when you use a computer program, with a specific set of clearly defined instructions, to buy and sell online. A typical computer can process several million decisions and arrive at the most suited one fitting the desired parameters. Just like when a prospective parent searches the matrimonial website based on parameters like height, weight, education, family background and gotra.
You can program a computer to buy 50 shares of ITC when its 50-day moving average goes above the 200-day moving average or Sell when its 50-day moving average goes below the 200-day moving average. In fact, the trader doesn’t have to watch live prices and punch in the orders manually. The algorithmic trading system automatically does it for him, in microseconds, faster than any human(Trader) can even press the mouse button.
Also called high frequency trading (HFT), Algo Trading capitalizes on placing a large number of orders at very fast speeds across multiple markets and multiple decision parameters and take advantage of systematic discrepancies.
But does this mean that an MBA analyst can be replaced? No. For the Algo to be programmed to Buy or Sell we should not what’s the value of a business. That’s where you come in. True value can be discovered only by the Analyst though the machine can do the Buying or Selling.
Take the regular Car on the road. The extent to which Automobiles are being taken over by computers is truly remarkable. Perhaps the first recall of a car due to software glitches was by Toyota in 2010, when it sought to rectify and recalibrate the electrically generated pedal “feel” in its braking system. The Prius, a hybrid, uses an electric generator to recharge batteries from the motion in the wheel and pools it back to the powertrain.
The degree of computerization of the engine and transmission has grown so much that we are actually driving a computer to work. Some of the components run by a computer in a car is Climate control, Alarm, engine management, wiper, Automatic transmission, ABS, airbag, parking aid and many others.
It was in 2007 that the U.S. announced tougher curbs on the emission of nitrogen oxide (NOx), and VW suspended sales of its diesel cars. It told the public, however, that it had something up its sleeve – the BlueTDI engine. But what was up its sleeve was a magic trick exposed by Daniel Carder and his small research team at West Virginia University. The team produced early evidence that Volkswagen AG was cheating on U.S. vehicle emissions tests by reprogramming a software Algorithm that changes when the car was being tested and shifts back when its back. This chicanery by the No.1 automaker in the world has been a shock to the public.
While U.S. regulators had started to investigate unusual emissions of certain models back in 2014 it took Volkswagen until Sept. 3, 2015, almost a year, to admit it had used the devices. VW has a problem. It is an empire spanning across 12 brands from Ducati motor bikes to Golf family sedans, Porsche roadsters, Scania trucks and MAN ship engines. With 592,000 employees, 119 factories in 31 countries, the giant looks ungovernable. Moreover, VW’s supervisory board is dominated by the Porsche-Piech family, regional politicians and German trade unions, making it too political to function effectively. Ethical moorings is a part of Corporate Culture and that is difficult to program digitally. Managers build Values in organizations and products. That can never be replaced.
– Prof. Sreeram Gopalkrishnan, AIMS
June 2, 2016