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Author: 
KHALID I. NATTO
Publication Date: 
Thu, 2011-01-13 01:45

The creation of cars through robots would allow for less defects, faster and continuous production, less cost of labor and labor related accidents.  The quality control of the product can be quantified statistically and the process can be adjusted to attain a perfect balance between the cost of goods produced and the highest quality standards. It leads to protocols and books that discuss statistical analysis for monitoring any process, such as Six Sigma, The Toyota Way and Lean. It’s gotten to a point that the cheapness of Asian labor argument has been deemed obsolete since everything is automated. If robots produce all cars then we should be able to produce the cars anywhere. Thus we at The KIN Consortium are supporters of the automation of the industrial sector, since it is our drive and motivation to industrialize Saudi Arabia. 
On the other hand, we do not believe in the automation of the services industry, especially in the financial markets sector. Based on our experience at Morgan Stanley, we believe that the price discovery process is a human decision-making process that cannot be automated by FAQ’s. The prices of cotton, coffee, gold and Apple Computer (AAPL) are the evidence of various inefficiencies in the financial markets. From our perspective, these items are not simply synonymous to defects in the manufacturing process. We can’t just tinker or manipulate the markets in order to correct the prices of these specific items. The reality is that we were born as individual humans that can and will make individual decisions. We shall not be categorized, labeled, measured or quantified into a corner of limited choices. We must allow for creativity and innovation. We must allow for free thought. The thing that distinguishes humans from animals is our ability to think. Join us in taking a stand to liberalize the free markets from automation and artificial demand.
The ideal market to use as a case study on the automation of the brokerage sector is the Tadawul, the Saudi Arabian stock market. It is a market that is free of high frequency traders or their 40 times leverage. Therefore, when one reviews the performance of this market they are actually measuring investor sentiment. Although the status quo in the Kingdom is going through a state of transition, we are truly excited about analyzing the role of the broker in the local brokerage industry.  Let’s take a moment to review the statistics of the Tadawul Annual Report as per the end of December 2010. 
There is an ongoing movement in the Kingdom to adopt certain standards of automation in the financial markets. The programs are being sold as high tech and efficient, just as they were sold in the US back in the late 1990’s. Let’s discuss the weaknesses of online trading program and the intrinsic value of educated relationship managers (CME Brokers). The role of the broker and the CME license are vital components to the brokerage industry. They are the human control to the investing community since they are charged with the CMA’s “Know Your Customer Rule.” The role of a fiduciary is similar to the role of a doctor. Just as a doctor identifies symptoms and prescribes medication, the registered CME broker must understand the client’s objectives and determine which investments are suitable for him. From our rudimentary analysis, we found that both Al Rajhi Capital and Samba Capital are leaning away from the client advisory business in brokerage. Regardless of their short sighted rationalizations of centralization, efficiency, and control, the statistics from Tadawul showed a dramatic pullback in trades, volume and value. The role of the CME and relationship manager cannot be supplanted by an online trading platform. The markets have to be reinforced with a coach who has the fundamentals of accounting and the technical analysis of the charts. The education of the client by the CME at the point of sale is the moment that confidence is introduced to the investors’ pool of experience.  The investment community is in need of the nurturing support of an educated coach, after all Islamic finance is still in its early stages of development. 
The failure of the automation of intangibles in the Western economies is evidenced by the wild underwritings in the financial crises. The failure of the Internet trading model is mentioned daily in the Western media as they complain about the lack of retail investors. When the retail investors do not participate in the markets then there are fundamental problems in the markets. We must learn from the mistakes of the early adopters of automation in the financial services sector.  They made the mistake of supplanting investors, brokers, and market makers with high frequency trading machines and leverage. That is what killed the confidence in the international financial markets. The investors do not want machines to supplant the human decision making process with statistical automation. The series 7 financial adviser and the CME financial adviser are playing two vital roles.  The first is the role of a doctor prescribing medication in determining suitability and the second is that they are setting the tone for the expectations of markets. They cannot be supplanted by the media, which hides behind free speech. That is the checks and balances that the investment community is craving.  Furthermore the liability of the fiduciary is the systemic control to wild underwritings in the financial markets. After all, we are looking for credibility in our investments and not some fixed game or casino.
 
— Khalid I. Natto is chairman & CEO of The KIN Consortium. He can be reached at [email protected]
 
 

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