Did the Machines Take Over the Stock Market?

Dow Jones Industrial Average (May 7, 2010)

Business analytics as a core process in financials services is quickly being transformed into automated decisioning as the power and ubiquity of computing is increasing.

There are obvious benefits but there are also risks, as we saw in yesterday's stock market plunge.

In today's (May 7, 2010) NYTimes, the article "Surge of Computer Selling After Apparent Glitch Sends Stocks Plunging" states:

"The glitch that sent markets tumbling Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200." 

The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that roiled markets Thursday.

“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime” 

 It will be important to get to the root cause of this near disaster but this quote would cause anyone concern:

"The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control."

For a short while, traders started to distrust what they were seeing.

“There was no pricing mechanism,” Mr. Clancy said. “There was nothing. No one knew what anything was worth. You didn’t know where to buy a stock or sell a stock.” 

Did the machines really take over?


Alan Wunsche
alan@wunsche.com