**Elie Ayache**

22 June 2020

**The Financial Market and the Criticism of Automation**

**1. Overview: **

Marxist criticism considers the financial market as the utmost achievement of abstraction. It is the jewel of capitalism, which is in turn the accomplishment of metaphysics and of the Greek logos. We argue, against that Marxist view, that the financial market should not be confused with capitalism, and even less so with the notions of algorithm and automatism. We extract this argument from the derivatives market.

**2. Argument:**

The Black-Scholes-Merton (BSM) algorithm is thought to value the derivative ‘automatically’. However, the derivative ends up being traded, in reality, and priced in its independent market, completely at variance with the algorithmic valuation of BSM. The space of possibilities underlying the algorithm is thus always blown apart by the innovation of the price of the derivative.

Moreover, derivatives can be written on derivatives and traded in turn, for example the volatility index (VIX) and futures and options written on it. The financial market, when thus understood as including all the layers of derivatives, can never be totalized in a space of possible states, that is to say, it can never be automated.

We thus overturn the meaning of automation. If the market is ever ‘automatic’, it will be in the sense that it, and it alone, can price the derivative — that the pricing of the derivative should be left to it. The market is as massive as history; it is history; and therefore ‘automation **of** the market’ can only be meant in the sense that history writes itself and it alone can write itself.

We even argue that the financial market is ‘earlier’ (in the process of genesis of thought) than the whole notion of automation, and for this reason can be critical of it. It is only because the market comes ‘earlier’ than the notion of algorithm and automation that it can lead to an alternative notion of automation*.*

**3. Conclusion:**

The financial market is not an abstract structure. On the contrary, it constitutes a concrete infrastructure that is alternative to the one underlying the traditional schema of abstraction. What the critics of abstraction have unconsciously in mind is in fact the schema of abstract probability theory. This is the schema that characterizes value, algorithm and machine. As for the financial market, when crucially it is augmented by all the layers of derivative instruments, it escapes probability theory and, consequently, all of the algorithmic project (in particular, algorithmic trading).

**Required Reading:**

Elie Ayache, On Black-Scholes

Elie Ayache, Response to Johnson: A random

sample versus the radical event

The Writing of the Market: Interview with Elie Ayache (COLLAPSE VIII)

**Elie Ayache** is a former option market-maker on MATIF (1987-1990) and LIFFE (1990-1995). He is the co-founder (1999) and currently the CEO of ITO 33, a financial derivatives technology company. He is the author of The Blank Swan: The End of Probability (Wiley 2010) and The Medium of Contingency: An Inverse View of the Market (Palgrave 2015)..