Japan’s fighter jet ambitions soaring with GCAP

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In December 2022, Japan, Italy and the United Kingdom signed an agreement to partner in the development of a sixth-generation stealth fighter aircraft.

The goal of the Global Combat Air Program (GCAP) is to produce aircraft ready for export and deployment by 2035. This represents a new frontier for Japanese weaponry co-development and is a prime opportunity to enhance regional security cooperation.

The United Kingdom’s and Italy’s motivation to partner with Japan in the GCAP is to fill gaps in development funding. The number of aircraft that will be produced and their technological development has improved through Japanese participation in the GCAP.

Initially, Japan was seeking “Japan-led development” of its Mitsubishi F-X fighter jet project, with a view to international cooperation in its Medium Term Defense Force Development Plan, assuming joint development with the United States or the United Kingdom.

But as the United States was reluctant to support “Japan-led development” and technology transfer, Japan chose the United Kingdom as a joint development partner for its next-generation fighter aircraft.

The Mitsubishi F-X is a sixth-generation stealth fighter in development for Japan and the nation’s first domestically developed stealth fighter jet. Credit: Japanese Ministry of Defense

Many contentious issues are expected to arise in the GCAP program, including negotiations over development initiatives, operations, specifications, the sharing of development costs, technology transfer, scheduling and production sharing.

The desired outcome of the GCAP is to contribute to regional security by establishing the weapon system as the core of NATO and AUKUS regional cooperation in responding to the war in Ukraine and military tension with China.

Operational requirements, technology and industry, development cost sharing and alliance politics are all essential in international joint development. But the negotiations in the GCAP seem to be driven mainly by alliance politics.

It is essential to understand the United Kingdom and Italy as partners in the context of Japan’s “Japan-led” development policies. During the 20 years of United States-Japan Mitsubishi F-2 fighter jet operations, Japan has been able to implement “Japan-led” development in operational requirements, upgrades and system integration. These are the three independent operations that should be continued in the GCAP.

These and other issues will likely be the subject of negotiations among the three countries. Japan has only co-developed defense technology projects with the United States in the past. Negotiation is essential for the success of the GCAP, which will be Japan’s first co-development with a country other than the United States.

The key to the success of the GCAP is to expand the number of aircraft produced before achieving economies of scale and learning curve effects through exports to the European and Asia Pacific markets, where many states are scheduled to begin their procurement of fifth- or sixth-generation fighter aircraft.

The key is to develop a cheap and downgraded version of the GCAP, not only for target countries that envisage modern air warfare in terms of stealth but also for those that do not. In the former case, the French-German-Spanish Future Combat Air System will be a contender, while in the latter, the South Korean-Indonesian KF-21 will be the frontrunner.

In the context of the AUKUS framework, it will be essential to determine what performance Australia requires of its next generation of fighter aircraft. Within the hub-and-spoke alliance network centered in the United States, it is necessary to promote regional cooperation among the United Kingdom, Japan and Australia.

AUKUS has strategic implications for Japan and its fighter aspirations. Image: US Embassy in China

The United Kingdom, Japan and Italy need to offer offset deals where Australia and other fourth countries can participate in the development and production of GCAPs and import non-fighter weapons, agricultural products and resources when they consider purchasing GCAPs.

Japan’s promotion of GCAP exports and offset deals requires a relaxation of its outdated Three Principles on the Transfer of Defense Equipment and Technology. Notably, the prohibition of transfers that “violate obligations under UN Security Council resolutions” needs to be reviewed urgently, as the UN Security Council has not been functioning effectively since the outbreak of the war in Ukraine.

Japan must shift its strategic outlook and promote a mission-oriented defense policy. By introducing mission engineering methods into GCAP development, which the United States and United Kingdom are leading, Japan can promote GCAP development smoothly and enhance regional security cooperation, including weapon systems, with AUKUS countries including Australia.

Takeshi Sakade is Professor in the Graduate School of Economics at Kyoto University.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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No clarity yet on China’s confused tech crackdown

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As China lifts Covid-19 restrictions and returns to normalcy, prospects for private business in the post-Covid economic recovery remain uncertain.

Despite former Vice Premier Liu He’s reiteration of the central government’s adherence to market principles at the World Economic Forum in January 2023, there are mixed messages about the Party’s stance towards the private tech sector.

The detention of Bao Fan, chairman and CEO of investment bank China Renaissance Holdings, in February sent shockwaves through international markets and among Chinese tech entrepreneurs. Bao was widely regarded as the country’s top dealmaker, whose company presided over several high-profile domestic tech deals.

On the other hand, Alibaba’s Jack Ma made a surprise reappearance in China in March, after traveling abroad for over a year. In a seemingly friendly gesture to the private sector, the Cyberspace Administration of China announced a campaign to crack down on false publicly circulated information which damages the reputation of private enterprises and entrepreneurs. But all of this does not suffice in restoring confidence in investors and businesses about a rollback of regulatory scrutiny of private tech companies.

To some, Bao’s detention indicates a continuation of Beijing’s heavy-handed approach to the country’s rising entrepreneurs that began with scuttling an initial public offering (IPO) for Ant Group, the e-payments platform founded by Jack Ma, in late 2020. This continued with tightened regulation over data security and anti-monopoly practices involving tech companies.

The Party’s stance and policy towards the tech sector — or more precisely, technology platforms and their partners — should be read in light of the multiple, often competing, challenges that the Party faces in governing modern China.

Chinese big tech and innovative entrepreneurs have contributed significantly to China’s transformation into a digital economy. At the same time, their rapid growth in size and wealth, as well as their evolving business models, have generated new challenges and instabilities.

Fintech regulation is one of these contradictions. Despite the merits of financial technology, excessive microlending without adequate security could create a financial bubble, posing systemic risk to the national financial system. Fintech companies like Ant have been forced to restructure and made subject to similar regulatory rules that govern other lending institutions.

The logo of Ant Group in Hangzhou Photo: AFP

Another area of contest is in the competition for talent across various fields related to technology development. The 14th Five-year Plan (2021–2025) spelled out ambitious objectives to turn China into a manufacturing powerhouse and a leader in emerging industries.

Competitive remuneration packages and unparalleled career prospects offered by leading platform companies, as well as the perceived invulnerability of the industry, had drawn many bright, young minds into technology-related business fields. This has changed since the government’s policy shift in 2020.

China now needs people to contribute to scientific and technological self-sufficiency in areas such as semiconductor development, robotics and climate change. The state’s clampdown on the business tech sector is thought to have had the effect of pushing people and resources into other areas — such as materials science, industrial machinery and biotechnology — deemed important to China’s overall technological capacity.

The Party’s tough treatment of some tech entrepreneurs could also have been connected to power struggles within the Party itself. Some key investors behind Ant Group’s IPO were known to be linked to top officials and elites with strong ties to former leader Jiang Zemin.

The tech sector may have become the site of a contest for political power. It is unclear with whom Bao is associated inside political circles, but he may have been caught up in a broader political struggle.

Party leaders will certainly continue to rely on China’s tech giants and their innovation to drive the economy. But ensuring that data is managed and used to the benefit of the Party as well as the public, not just private actors, remains a key logic in the Chinese Communist Party’s governance.

The announcement at the “Two Sessions” of the establishment of a National Data Bureau is Beijing’s latest step to exploit the country’s massive data trove. This will allow institutionalization of the management and control of data, while also facilitating circulation of both public and private data resources to promote economic and social development.

Setting up the new National Data Bureau under the National Development and Reform Commission will give focus to implementing policies that help drive digital and cutting-edge industries. The bureau could potentially become a driver of “Digital China“, after years of slow development because of the pandemic and regulatory scrutiny.

Given the Party’s overriding priorities of rebuilding a strong domestic economy and maintaining robust supply chains against external threats, it is unlikely to embark on an extensive campaign like it did in 2020 and 2021 to rein in technology platforms. That would undermine an important engine of growth and investor confidence, adding pressures to government finances.

One can still expect uncertainties over how the Party treats individual private businesses. This is especially so when China’s political leaders deem it necessary to prioritize certain objectives, such as political control and maintaining social stability over other priorities including economic recovery and growth.

Yvette To is a Postdoctoral Fellow in the Department of Public and International Affairs at the City University of Hong Kong.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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China bans major chip maker Micron from key infrastructure projects

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A smartphone with a Micron logo on a computer motherboard.Reuters

China says products made by US memory chip giant Micron Technology are a national security risk.

The country’s cyberspace regulator announced on Sunday that America’s biggest maker of memory chips poses “serious network security risks”.

It means the firm’s products will be banned from key infrastructure projects in the world’s second largest economy.

It is China’s first major move against a US chip maker, as tensions increase between Beijing and Washington.

“The review found that Micron’s products have serious network security risks, which pose significant security risks to China’s critical information infrastructure supply chain, affecting China’s national security,” the Cyberspace Administration of China (CAC) said in a statement.

The CAC did not give details of risks it said it had found or in which Micron products it had found them.

A Micron spokesperson confirmed to the BBC that the company had “received the CAC’s notice following its review of Micron products sold in China”.

“We are evaluating the conclusion and assessing our next steps. We look forward to continuing to engage in discussions with Chinese authorities,” they added.

In response, the US said it would work with allies to address what it called “distortions of the memory chip market caused by China’s actions”.

“We firmly oppose restrictions that have no basis in fact,” US Commerce Department a spokesperson said.

“This action, along with recent raids and targeting of other American firms, is inconsistent with [China’s] assertions that it is opening its markets and committed to a transparent regulatory framework,” it added.

The CAC’s announcement came a day after a G7 leaders meeting in Japan issued a statement criticising China’s human rights record, economic policies and increased military presence in the East and South China Seas.

On Sunday, US President Joe Biden said G7 nations were looking to “de-risk and diversify our relationship with China.”

“That means taking steps to diversify our supply chains,” he added.

Micron chief executive Sanjay Mehrotra attended the summit in Hiroshima as part of a group of business leaders.

Last week, the company said it would invest around 500bn yen ($3.6bn; £2.9bn) to develop technology in Japan.

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Exports of rice surge to 2.8m tonnes

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Demand grows despite prices

Rice exports topped 2.79 million tonnes from January to April with the volume for the entire year forecast to exceed 8 million tonnes, the government said.

Prime Minister Prayut Chan-o-cha was upbeat about the figure, valued at US$1.5 billion (51.2 billion baht), up 23% from the same period last year, said government spokesman Anucha Burapachaisri.

The prime minister has instructed state agencies to work proactively to improve rice exports further and increase crop production while pushing to keep rice prices high in overseas markets, Mr Anucha said.

He added exports of Thai rice are expected to keep rising on the back of growing demand in many countries.

Currently, Thailand is the world’s second-largest rice exporter after India.

In April, the hike in rice prices was attributed to the stable baht which has kept the commodity competitive in foreign markets.

As a result, the prices of most types of rice have risen beyond the government’s price guarantee.

The Agriculture and Cooperatives Ministry has now predicted rice exports will surpass the yearly target.

The Department of Internal Trade (DIT) forecasts exports will reach 8 million tonnes, up from 7.69 million tonnes in 2022.

As of May 10, rice exports stood at 3.05 million tonnes, according to Mr Anucha, adding orders for Thai rice from overseas keep on climbing.

Major markets for Thai rice include Iraq, Indonesia, the US, South Africa, Senegal, Bangladesh, China, Japan, Cameroon and Mozambique. Thailand mostly exports white rice the most, followed by jasmine rice.

Mr Anucha said the prime minister thanked state agencies and the private sector for their efforts in marketing and developing the quality of rice for export to meet demand. However, Gen Prayut has cautioned against fraudulent exports, which could damage the reputation of Thai rice internationally.

Udom Srisomsong, deputy director-general of the DIT, said global demand for Thai rice remains strong, which has sustained prices and made them competitive.

The high export prices have offset the need for the government to step in and use its price guarantee measure to assist farmers.

The Thai Rice Exporters Association, meanwhile, said it fails to see any clarity in measures dealing with crop prices from the Move Forward Party or Pheu Thai, the two main parties that will form the new government. They are thrashing out a memorandum of understanding covering key policy areas as part of the deal.

Charoen Laothamthat, the association president, said a change of government should not stall or bring abrupt changes to policies that hinder the development of key crops.

Companies fear Thailand may be losing its competitiveness in exporting rice to Vietnam.

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‘Market fundamentalism’ is an obstacle to social progress

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A changing world order, a shrinking US empire, migrations and related demographic shifts, and major economic crashes have all enhanced religious fundamentalisms around the world.

Beyond religions, other ideological fundamentalisms likewise provide widely welcomed reassurances. One of the latter, market fundamentalism, invites and deserves criticism as a major obstacle to navigating this time of rapid social change.

Market fundamentalism attributes to that particular social institution a level of perfection and “optimality” quite parallel to what fundamentalist religions attribute to prophets and divinities.

Yet markets are just one among many social means of rationing. Anything scarce relative to demand for it raises the same question: Who will get it and who must do without it?

The market is one institutional way to ration the scarce item. In a market, those who want it bid up its price, leading others to drop out because they cannot or will not pay the higher price. When higher prices have eliminated the excess of demand over supply, scarcity is gone, and no more bidding up is required. Those able and willing to pay the higher prices are satisfied by receiving distributions of the available supply.

The market has thus rationed out the scarce supply. It has determined who gets and who does not. Clearly, the richer a buyer is, the more likely that buyer will welcome, endorse, and celebrate “the market system.”

Markets favor rich buyers. Such buyers in turn will more likely support teachers, clerics, politicians, and others who promote arguments that markets are “efficient,” “socially positive,” or “best for everyone.”

Alternatives acknowledged

Yet even the economics profession, which routinely celebrates markets, includes a sizable – if underemphasized – literature about how, why, and when free (that is, unregulated) markets do not work efficiently or in socially positive ways. That literature has developed concepts like “imperfect competition,” “market distortions,” and “externalities,” to pinpoint markets failing to be efficient or benefit social welfare.

Social leaders who have had to deal with actual markets in society have likewise repeatedly intervened in them when and because markets worked in socially unacceptable ways. Thus we have minimum-wage laws, maximum-interest-rate laws, price-gouging laws, and tariff and trade wars.

Practical people know that “leaving matters to the market” has often yielded disasters (for example, the crashes of 2000, 2008 and 2020) overcome by massive, sustained governmental regulation of and intervention in markets.

So then why do market fundamentalists celebrate a rationing system – the market – that in both theory and practice is more replete with holes than a block of Swiss cheese?

Libertarians go so far as to promote a “pure” market economy as a realizable utopia. Such a pure market system is their policy to fix the massive problems they admit exist in contemporary (impure) capitalism. Libertarians are forever frustrated by their lack of success.

For many reasons, markets ought not claim anyone’s loyalty. Among alternative systems of rationing scarcity, markets are clearly inferior.

For example, in many religious, ethical and moral traditions, basic precepts urge or insist that scarcity be addressed by a rationing system based on their respective concepts of human need.

Many other rationing systems – including the US version used in World War II – dispensed with the market system and substituted a needs-based rationing system managed by the government.

Rationing systems could likewise be based on age, type of work performed, employment status, family situation, health conditions, distance between home and workplace, or other criteria. Their importance relative to one another and relative to some composite notion of “need” could and should be determined democratically.

Indeed, a genuinely democratic society would let the people decide which (if any) scarcities should be rationed by the market and which (if any) by alternative rationing systems.

Ideology vs reality

Market fetishists will surely trot out their favorite rationalizations with which to regale students. For example, they argue that when buyers bid up prices for scarce items, other entrepreneurs will rush in with more supply to capture those higher prices, thereby ending the scarcity.

This simple-minded argument fails to grasp that the entrepreneurs cashing in on the higher prices for scarce items have every incentive and many of the means to prevent, delay, or block altogether the entry of new suppliers. Actual business history shows that they often do so successfully.

In other words, glib assurances about reactions to market prices are ideological noise and little else.

We can also catch the market fetishizers in their own contradictions. When justifying the sky-high pay packages of mega-corporate CEOs, we are told their scarcity requires their high prices. The same folks explain to us that to overcome scarcity of wage labor, it was necessary to cut US workers’ pandemic-era unemployment supplement, not to raise their wages.

During times of scarcity, markets often reveal to capitalists the possibility of earning higher profits on lower volumes of product and sales. If they prioritize profits and when they can afford to bar others’ entry, they will produce and sell less at higher prices to a richer clientele. We are watching that process unfold in the United States now.

The neoliberal turn in US capitalism since the 1970s yielded big profits from a globalized market system.

However, outside the purview of neoliberal ideology, that global market catapulted the Chinese economy forward far faster than the United States’ and far faster than the US found acceptable. Thus the US junked its market celebrations (substituting intense “security” concerns) to justify massive governmental interventions in markets to thwart Chinese development: a trade war, tariff wars, chip subsidies, and sanctions.

Awkwardly and unpersuasively, the economic profession keeps teaching about the efficiency of free or pure markets, while students learn from the news all about protectionism, market management, and the need to turn away from the free market gods previously venerated.

Then too the market-based health-care system of the United States challenges market fundamentalism: The US has 4.3% of the world population but accounted for 16.9% of the world’s Covid-19 deaths. Might the market system bear a significant share of the blame and fault here?

So dangerous is the potential disruption of ideological consensus that it becomes vital to avoid asking the question, let alone pursuing a serious answer.

During the pandemic, millions of workers were told that they were “essential” and “front-line responders.” A grateful society appreciated them. As they often noted, the market had not rewarded them accordingly. They got very low wages. They must not have been scarce enough to command better.

That’s how markets work. Markets do not reward what is most valuable and essential. They never did. They reward what is scarce relative to people’s ability to buy, no matter the social importance we give to the actual work and roles people play.

Markets pander to where the money is. No wonder the rich subsidize market fundamentalism. The wonder is why the rest of society believes or tolerates it.

This article was produced by Economy for All, a project of the Independent Media Institute, which provided it to Asia Times.

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Taiwan pushes FTA after closing US trade deal

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Taiwan is seeking to reach a free trade agreement (FTA) with the United States after both sides concluded a trade initiative to boost their economic ties.

The United States Trade Representative announced on Thursday that the American Institute in Taiwan (AIT) and the Taipei Economic and Cultural Representative Office in the United States (TECRO) have concluded negotiations on the US-Taiwan Initiative on 21st Century Trade.

The agreement came just before the three-day G7 Summit started in Hiroshima in Japan on Friday.

Taiwanese media said Hsiao Bi-khim, representative of the Republic of China to the US, will visit Washington and sign the first phase of the trade initiative with her US counterpart within the coming weeks.

The first phase of this agreement covers five areas, including customs administration and trade facilitation, good regulatory practices, domestic services regulation, anticorruption and small-and-medium-sized-enterprises (SMEs).

“This agreement is not only the most comprehensive trade agreement signed between Taiwan and the US since 1979, but also represents an important milestone for Taiwan’s economic and trade system to meet high international standards,” the Office of Trade Negotiations, Taiwan’s Executive Yuan says in a statement. “This is also an important step in completing the Taiwan-US FTA by means of building blocks.”

In January 1979, the US established diplomatic relations with the People’s Republic of China as the Chinese Communist Party claimed to be a united front with the West against the Soviet Union. It also ended its diplomatic relations with Taiwan but has maintained trade and cultural exchanges with the island under the Taiwan Relations Act. 
 
On Friday, Beijing said it resolutely opposes the US-Taiwan Trade Initiative.

“China firmly opposes all forms of official interaction with the Taiwan region by countries having diplomatic ties with China, including negotiating or concluding agreements with implications of sovereignty and of official nature,” Wang Wenbin, a spokesperson of the Chinese Foreign Ministry, said Friday. 

Wang said the US must stop sending wrong signals to Taiwan separatists in the name of forming trade and economic ties with the island. He said the US should strictly abide by the one-China principle and the three Joint Communiqués with real actions.

Meanwhile, the State Council’s Taiwan Affairs Office (TAO) announced on Friday that China had reopened its doors to Taiwanese tour groups with immediate effect.

“We warmly welcome Taiwan compatriots to see the beautiful scenery and recent developments in the mainland,” said TAO spokesperson Ma Xiaoguang.
 
The symbolic move is seen as Beijing’s effort to increase exchanges with the island ahead of its presidential election in early 2024.

The central committee of Kuomintang (KMT), favored by the Chinese Communist Party (CCP), on Wednesday nominated New Taipei mayor Hou Yu-ih as KMT’s presidential candidate without having a primary election within the party.

Hou Yu-ih, Photo: Wikimedia Commons

Regional trade deals

In September 2021, Taiwan formally applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) but progress has been slow so far.
 
In May last year, the Biden administration launched the Indo-Pacific Economic Framework for Prosperity (IPEF) but did not include Taiwan as a founding member. Founding nations include Australia, Brunei, Fiji India, Indonesia, Japan, South Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and Vietnam. 

Last June, the US and Taiwan said they would begin bilateral trade talks. Both sides met initially last November and held a four-day negotiation in January this year with fruitful results.
 
“It’s usually easier to reach a bilateral trade deal than a multilateral one that involves more parties,” Darson Chiu, a research fellow of the Department of International Affairs and Macroeconomic Forecasting Center, Taiwan Institute of Economic Research, said in January. “The US-Taiwan Trade Initiative will help Taiwan enter the IPEF.” 

On Friday, the US and Taiwan finalized the first phase of the trade initiative. Taiwan’s Minister Without Portfolio and Trade Representative John Deng said earlier this month that the second phase of the agreement, which covers seven areas such as agriculture and labor, should be reached by the end of this year.
 
“This accomplishment represents an important step forward in strengthening the US-Taiwan economic relationship,” US Trade Representative Katherine Tai said Thursday. “We look forward to continuing these negotiations and finalizing a robust and high-standard trade agreement that tackles pressing 21st century economic challenges.”

Tai said US businesses will be able to bring more products to Taiwan and Taiwanese customers, while creating more transparent and streamlined regulatory procedures that can facilitate investment and economic opportunities in both markets, particularly for SMEs.

Chinese pundits’ criticism

While Taiwanese President Tsai Ing-wen said Taiwan will be able to sign a FTA with the US, Chinese commentators poured cold water on the idea.

“The biggest intention of the Democratic Progressive Party (DPP) to sign the so-called US-Taiwan Trade Initiative is to sell Taiwan to the US and maximize the US’s benefits on the island,” Kong Fan, a Sichuan-based reporter for Nouvelles d’Europe, a pro-Beijing newspaper, writes in an article on Friday. 

Kong says the DPP wants to use this deal to form stronger political and military ties with the US in order to promote Taiwan independence.

He says the US avoided discussing tariff exemptions and market access but highlighted its benefits. He says before this, the US has been pressuring TSMC to build foundries in Arizona and the Taiwanese government to buy US weapons.

On June 2 last year, Tseng Ming-chung, convener of the KMT legislative caucus, criticized the DPP for exaggerating the benefits of the US-Taiwan Trade Initiative, which does not mention FTA or CPTPP membership. 

But after seeing the actual trade initiative on Friday, Tseng said the Tsai administration should “sign it as soon as possible” and make good use of the close bilateral relations to resolve tariff and double taxation issues with the US.

Read: Beijing cools Taiwan issues ahead of G7 Summit

Read: US-Taiwan trade deal talks defy China’s warning

Follow Jeff Pao on Twitter at @jeffpao3

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Speeding toward a ChatGPT-powered Wall Street

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Artificial Intelligence-powered tools, such as ChatGPT, have the potential to revolutionize the efficiency, effectiveness and speed of the work humans do.

And this is true in financial markets as much as in sectors like health care, manufacturing and pretty much every other aspect of our lives.

I’ve been researching financial markets and algorithmic trading for 14 years. While AI offers lots of benefits, the growing use of these technologies in financial markets also points to potential perils. A look at Wall Street’s past efforts to speed up trading by embracing computers and AI offers important lessons on the implications of using them for decision-making.

Program trading fuelled Black Monday

In the early 1980s, fueled by advancements in technology and financial innovations such as derivatives, institutional investors began using computer programs to execute trades based on predefined rules and algorithms. This helped them complete large trades quickly and efficiently.

Back then, these algorithms were relatively simple and were primarily used for so-called index arbitrage, which involves trying to profit from discrepancies between the price of a stock index – like the S&P 500 – and that of the stocks it’s composed of.

As technology advanced and more data became available, this kind of program trading became increasingly sophisticated, with algorithms able to analyze complex market data and execute trades based on a wide range of factors. These program traders continued to grow in number on the largey unregulated trading freeways – on which over a trillion dollars worth of assets change hands every day – causing market volatility to increase dramatically.

Eventually this resulted in the massive stock market crash in 1987 known as Black Monday. The Dow Jones Industrial Average suffered what was at the time the biggest percentage drop in its history, and the pain spread throughout the globe.

In response, regulatory authorities implemented a number of measures to restrict the use of program trading, including circuit breakers that halt trading when there are significant market swings and other limits. But despite these measures, program trading continued to grow in popularity in the years following the crash.

HFT: Program trading on steroids

Fast forward 15 years, to 2002, when the New York Stock Exchange introduced a fully automated trading system. As a result, program traders gave way to more sophisticated automations with much more advanced technology: High-frequency trading.

HFT uses computer programs to analyze market data and execute trades at extremely high speeds. Unlike program traders that bought and sold baskets of securities over time to take advantage of an arbitrage opportunity – a difference in price of similar securities that can be exploited for profit – high-frequency traders use powerful computers and high-speed networks to analyze market data and execute trades at lightning-fast speeds.

High-frequency traders can conduct trades in approximately one 64-millionth of a second, compared with the several seconds it took traders in the 1980s.

These trades are typically very short term in nature and may involve buying and selling the same security multiple times in a matter of nanoseconds. AI algorithms analyze large amounts of data in real time and identify patterns and trends that are not immediately apparent to human traders. This helps traders make better decisions and execute trades at a faster pace than would be possible manually.

Another important application of AI in HFT is natural language processing, which involves analyzing and interpreting human language data such as news articles and social media posts. By analyzing this data, traders can gain valuable insights into market sentiment and adjust their trading strategies accordingly.

Benefits of AI trading

These AI-based, high-frequency traders operate very differently than people do.

The human brain is slow, inaccurate and forgetful. It is incapable of quick, high-precision, floating-point arithmetic needed for analyzing huge volumes of data for identifying trade signals. Computers are millions of times faster, with essentially infallible memory, perfect attention and limitless capability for analyzing large volumes of data in split milliseconds.

And, so, just like most technologies, HFT provides several benefits to stock markets.

These traders typically buy and sell assets at prices very close to the market price, which means they don’t charge investors high fees. This helps ensure that there are always buyers and sellers in the market, which in turn helps to stabilize prices and reduce the potential for sudden price swings.

High-frequency trading can also help to reduce the impact of market inefficiencies by quickly identifying and exploiting mispricing in the market. For example, HFT algorithms can detect when a particular stock is undervalued or overvalued and execute trades to take advantage of these discrepancies. By doing so, this kind of trading can help to correct market inefficiencies and ensure that assets are priced more accurately.

a crowd of people move around a large room with big screens all over the place
Stock exchanges used to be packed with traders buying and selling securities, as in this scene from 1983. Today’s trading floors are increasingly empty as AI-powered computers handle more and more of the work. Photo: AP / Richard Drew

The downsides

But speed and efficiency can also cause harm.

HFT algorithms can react so quickly to news events and other market signals that they can cause sudden spikes or drops in asset prices.

Additionally, HFT financial firms are able to use their speed and technology to gain an unfair advantage over other traders, further distorting market signals. The volatility created by these extremely sophisticated AI-powered trading beasts led to the so-called flash crash in May 2010, when stocks plunged and then recovered in a matter of minutes – erasing and then restoring about $1 trillion in market value.

Since then, volatile markets have become the new normal. In 2016 research, two co-authors and I found that volatility – a measure of how rapidly and unpredictably prices move up and down – increased significantly after the introduction of HFT.

The speed and efficiency with which high-frequency traders analyze the data mean that even a small change in market conditions can trigger a large number of trades, leading to sudden price swings and increased volatility.

In addition, research I published with several other colleagues in 2021 shows that most high-frequency traders use similar algorithms, which increases the risk of market failure. That’s because as the number of these traders increases in the marketplace, the similarity in these algorithms can lead to similar trading decisions.

This means that all of the high-frequency traders might trade on the same side of the market if their algorithms release similar trading signals. That is, they all might try to sell in case of negative news or buy in case of positive news. If there is no one to take the other side of the trade, markets can fail.

Enter ChatGPT

That brings us to a new world of ChatGPT-powered trading algorithms and similar programs. They could take the problem of too many traders on the same side of a deal and make it even worse.

In general, humans, left to their own devices, will tend to make a diverse range of decisions. But if everyone’s deriving their decisions from a similar artificial intelligence, this can limit the diversity of opinion.

Consider an extreme, nonfinancial situation in which everyone depends on ChatGPT to decide on the best computer to buy. Consumers are already very prone to herding behavior, in which they tend to buy the same products and models. For example, reviews on Yelp, Amazon and so on motivate consumers to pick among a few top choices.

Since decisions made by the generative AI-powered chatbot are based on past training data, there would be a similarity in the decisions suggested by the chatbot. It is highly likely that ChatGPT would suggest the same brand and model to everyone. This might take herding to a whole new level and could lead to shortages in certain products and service as well as severe price spikes.

This becomes more problematic when the AI making the decisions is informed by biased and incorrect information. AI algorithms can reinforce existing biases when systems are trained on biased, old or limited data sets. And ChatGPT and similar tools have been criticized for making factual errors.

AI is making strides in learning the English language. Image: Facebook

In addition, since market crashes are relatively rare, there isn’t much data on them. Since generative AIs depend on data training to learn, their lack of knowledge about them could make them more likely to happen.

For now, at least, it seems most banks won’t be allowing their employees to take advantage of ChatGPT and similar tools. Citigroup, Bank of America, Goldman Sachs and several other lenders have already banned their use on trading-room floors, citing privacy concerns.

But I strongly believe banks will eventually embrace generative AI, once they resolve concerns they have with it. The potential gains are too significant to pass up – and there’s a risk of being left behind by rivals.

But the risks to financial markets, the global economy and everyone are also great, so I hope they tread carefully.

Pawan Jain, Assistant Professor of Finance, West Virginia University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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G7 leaders must resist US calls for more protectionism

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The Group of Seven Summit taking place in Japan this weekend could herald the start of a new era of global protectionism as the US continues its push for a G7-wide “screening of outbound investments” to China in certain cutting-edge technologies.

The European Union and the UK are also reported to be discussing a reinforcement of export controls on semiconductors and other technology that is regarded as critical to China.

As leaders of the world’s seven largest so-called “advanced” economies, which dominate global trade and the international financial system, US Treasury Secretary Janet Yellen, who was in Japan last week for a meeting of finance ministers, has said, “Obviously, it would be most effective if there’s coordinated action by a group of like-minded countries and agreement that this is a useful approach.”

She added that the United States would continue “informal” discussions on the measures with other G7 members, which are Canada, France, Germany, Italy, Japan and the UK.

The existing restrictions to China from the US and others have already led to a sharp fall in high-end tech exports, and with geopolitical competitions between the US and China seemingly intensifying, it is likely Western countries, led by America, will impose further export controls on new sectors and industries. These could include biopharma, biotech, and agricultural products, such as seeds.

While clearly every country needs to look out for its own interests in all levels, I am skeptical about the creeping protectionism and urge political and business leaders to pursue a safe and secure form of globalization.

As we have borne witness to in recent decades, globalization promotes economic growth by facilitating the free flow of goods, services, and capital across borders. When countries open up to international trade, they access larger markets, benefit from economies of scale, and attract foreign investment. This, in turn, leads to increased productivity, job creation, and higher living standards.

Also, critically, it encourages the exchange of ideas, knowledge and technologies among countries. It allows for the transfer of best practices, encourages innovation through competition, and facilitates international collaboration on research and development. 

Through allowing the import of goods and services from different countries, consumers typically gain access to a wider range of products at competitive prices. On the other hand, protectionist measures restrict choices, limit competition, and raise prices for consumers.

Globalization has the potential to lift millions of people out of poverty. By integrating into the global economy, developing countries can attract foreign investment, access new markets, and diversify their economies. 

In addition, a rejection of protectionism fosters international cooperation and diplomacy. By engaging in open trade and maintaining strong economic ties, G7 members can build mutually beneficial relationships with other nations.

This can lead to improved diplomatic relations, increased stability, and enhanced collaboration on global challenges such as climate change, cybersecurity, and public health.

While globalization has its challenges, the benefits outweigh the drawbacks. By embracing globalization and rejecting protectionism, G7 members can contribute to a more prosperous, interconnected, and peaceful world.

Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.

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S,100 for a food delivery job in Singapore: Rider accounts for sale illegally on Carousell

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What was left unsaid on the Carousell listings is that people interested in obtaining such accounts are likely to be foreigners. Only Singaporeans and permanent residents can legally work as riders for food delivery platforms. 

Mr Luqmanul Hakim, a local delivery rider, told CNA he also found food delivery rider advertisements in a Facebook group for Malaysians looking for jobs in Singapore. When he replied to one such listing by posing as an interested buyer, he was told he would be working as a rider for foodpanda or Deliveroo.

When CNA contacted the same person, she said vacancies were closed, but that she would reach out if a delivery rider position opened up.

SECURITY MEASURES IN PLACE: DELIVERY PLATFORMS

In response to queries from CNA, foodpanda said it has measures in place to detect improper use of its accounts.

For example, it introduced a “selfie verification” feature in October 2022. Delivery riders must take a selfie of themselves before the start of their shift. Those who are caught exploiting the verification process may have their accounts suspended or potentially blacklisted, foodpanda said. 

Deliveroo’s website states that riders are allowed to appoint substitutes to use their accounts, but these substitute riders have to meet age and residency requirements, among others.

“We have a number of measures to identify fraudulent behaviour and keep these measures under regular review, including (trialling) and rolling out facial verification checks across our international markets with the aim of bringing this to Singapore soon,” Deliveroo said.

The company added that it encourages riders to report anyone they believe to have violated the rules.

In response to queries, Carousell said it is “not privy to and not in a position to enforce” the agreements made between the food delivery platform and the rider.

“However we will review on a case-by-case basis if the platform is able to provide evidence of known illegal activity,” its spokesperson said.

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