January 30, 2013

Resonant Frequency

You can wet a finger and run it on the rim of a glass, producing a hum. Sustained, that frequency can shatter glass. Do high-speed markets have resonant frequency?

In April 1850 the Angers Bridge over the Maine River in France collapsed, killing 226 French soldiers who were in the process of marching across it. While other factors may have contributed, the principle of resonance, in which systems oscillate with greater amplitude at certain frequencies, has long discouraged troops from cadenced marches over suspension bridges. Structures can reach terminal amplitude and collapse.

Serbian inventor Nikola Tesla, the eponymous force behind a sizzling electric automobile from PayPal founder Elon Musk, applied the principle of resonant frequency to his tests with electricity. Some theorize that an experiment of Tesla’s gone awry, rather than a meteor smashing through earth’s atmosphere, caused the mysterious Tunguska detonation in Siberia June 30, 1908.

Ostensibly Tesla meant to create a light show in the arctic for potential investors by using resonant frequency to generate an electromagnetic pulse that would collide particles and produce a fantastic light show. Whatever happened in Tunguska (reputedly at the exact instant of Tesla’s pulse, since light travels 186,000 miles per second), the explosion was a thousand times greater than the atomic weapon at Hiroshima in World War Two and remains by estimates the second-largest ever, behind a 1961 Soviet hydrogen-bomb test.

What’s this got to do with investor-relations and market structure? I’m not suggesting that high-frequency trading will someday crescendo to resonant frequency, causing global trading markets to suddenly blink out in a white-hot Tesla catastrophe.

But how things work matters. It’s not just nice to know – it’s essential to understanding behavior. Lots of IR folks today cling to the idea that trading doesn’t matter because it’s noise. In fact, it’s the architecture of the movement of money – the circuitry, the physics.

Did you know that Tesla believed free energy abounds and no wires are needed to transmit it? I hope he’s proved right someday. In your trading, the 15% of money buying fundamentals must navigate a complex environment to move from point A to point B.

How do you know if your shares are fairly valued by the market? Simple. When the price active money pays is roughly equal to the price applied to move it around. That measure manifests only periodically – but it’s there as though Tesla were conducting experiments on it.

So market structure isn’t just interesting. It’s essential. Speaking of which: I’ll join Tessera Technologies’ Moriah Shilton and Seagate Technology’s Kate Scolnick – IROs who understand market structure – for a market-structure discussion on the web, courtesy of NIRI, Tuesday Feb 5 at 1p ET. We’ll talk about its practical application to IR today.

Come throw hard questions at us!

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