How High-Frequency Trading Is Changing Wall Street
January 13, 2011
On May 6, 2010, the Dow Jones industrial average dropped hundreds of points in a matter of minutes — and then recovered moments later.
Known as the “flash crash,” the incident sparked congressional hearings as well as an investigation by the Securities and Exchange Commission and the Commodity Futures Trading Commission. The two market regulators later issued a joint report in September blaming a single sale — of $4.1 billion in future contracts — for the nosedive.
On the downsides of computers making investment decisions:
“The downside is they don’t have a smell test. They don’t have the basic common sense that most of the rest of us do. So back in May, for instance, we had this incident known as the flash crash, where the stock market plunged over 500 points in the space of about 5 minutes. And no one really knows why that happened.
No one quite understands the mechanisms — the self-snowballing — which caused all of these computer programs to either pile onto the selling or else to just turn off altogether and to say, ‘This is too volatile; we’re leaving the market.’ What we do know is that there were some crazy trades which happened in those five minutes. We had stocks trading for a penny a share or $100 a share, and no human would do that.
What we think is that, left to their own devices, every so often when you have a highly complex system like this, it can just spin out of control, and it’s hard to know when or how or whether a market is going to spin out of control in that way. Most of the time, computerized trading makes things faster and better and more efficient, but sometimes you get these things called tail events — which you couldn’t ever expect — which can cause quite a lot of chaos.”
Algorithms Take Control of Wall Street
seven key factors, including the judgment of his neural network
“we create more than we can understand”