Wall Street's black boxes bite back

That stunning, though brief, drop of $1 trillion in market value exposed the dangers of today's quick-fire, computerized trading.

By unknownUser May 7, 2010 12:07PM

By Michael Brush


It's pretty scary that the Dow Jones industrials ($INDU) can fall nearly 1,000 points in a lightning-fast market rout that erased $1 trillion in minutes -- if only briefly -- and a day later, nobody knows why it happened.


So much for the "efficient market hypothesis" that they teach in business school -- which we all knew was bunk anyway. Instead, it's possible that a simple computer glitch set off a panic.


I wrote about the latest in quick-fire computer-driven trading last August in "Wall Street's high-tech war on investors," saying in part, "We all get hurt if their rapid-fire trading systems spark a quick sector or market meltdown -– a real possibility, according to several analysts." Sounds now like that risk is more than a possibility.


Plenty of plausible explanations have made the news, from a "fat-fingered" keying error that turned a $16 million sell order into $16 billion to the suggestion that when the main exchanges took steps to slow down trading, orders spilled over to smaller exchanges. There, the natural scarcity of buyers let share prices to fall to pennies.

Wall Street being Wall Street, I'm not going to be surprised at all if it all turns out to be a big case of market manipulation. If so, hopefully the Securities and Exchange Commission can gather enough evidence to press charges.


But whether an accident or something worse, the meltdown again exposed technology-based vulnerabilities in our markets that are glaringly obvious and need to be addressed. These days, computers account for an estimated 60% or more of all trading. If you figure out how to trick the systems or simply do something to throw them off balance, then voilà. Arrays of powerful bots make a mess of things.


Whatever got the ball rolling yesterday, it's clear that things got a lot worse when the masters of the computer trading that provide so much market liquidity shut down their systems. Stocks then took their real dive.


Computers, no doubt, can help exchanges work much better. But is this any way to run a market?


And will we ever really know what happened? Hopefully, there are enough people at the SEC not surfing porn to figure it out.


But even if the mystery remains, it's already clear that leaving so much of "market efficiency" to computers is a bad idea. 

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