January 28th, 2011
The snow gave me a chance to catch up on the last couple issues of Wired. Chris Anderson is, for me, a lot like Tina Fey. His book contains so much great stuff that when it lapses into simplemindedness, it seems inexcusable.
In any event, the last two issues exemplify how great Wired can be. In the January issue Felix Salmon and Jon Stokes write about how algorithms have taken over a large portion of the finance world. Maybe this is old news to people who work in the industry, but it knocked me flat:
On May 6, 2010, the Dow Jones Industrial Average inexplicably experienced a series of drops that came to be known as the flash crash, at one point shedding some 573 points in five minutes. Less than five months later, Progress Energy, a North Carolina utility, watched helplessly as its share price fell 90 percent. Also in late September, Apple shares dropped nearly 4 percent in just 30 seconds, before recovering a few minutes later.
These sudden drops are now routine, and it’s often impossible to determine what caused them. . . .
In late September, the Commodity Futures Trading Commission and the Securities and Exchange Commission released a 104-page report on the May 6 flash crash. The culprit, the report determined, was a “large fundamental trader” that had used an algorithm to hedge its stock market position. The trade was executed in just 20 minutes—an extremely aggressive time frame, which triggered a market plunge as other algorithms reacted, first to the sale and then to one another’s behavior. The chaos produced seemingly nonsensical trades—shares of Accenture were sold for a penny, for instance, while shares of Apple were purchased for $100,000 each. (Both trades were subsequently canceled.)
This should scare us. Not for the obvious reasons–that we’ve built a machine and we don’t really understand how it works. (After all, the stock market was a black box even before we turned it over to the computers.)
But the rise of the algorithms is yet another example of how the world of finance is no longer a business of allocating capital. It’s just a money machine, not much different from a casino, which acts almost like a closed system. Which is why you can have spectacular stock growth even while the real world remains mired in serious economic problems. Maybe this disconnect isn’t the end of the world. But it’s not obvious to me why it should be sustainable and harmless.
PS: The current issue of Wired isn’t up on the web yet, but it’s got a 5-star story on how scratch-game lotto tickets can be cracked and how organized crime may (or may not) be using this public lottery to launder money. It’s crazy, crazy good.
BTD January 28, 2011 at 3:14 pm
You’ve hit on something here that I’ve wondered about for the past two years — are these lapses actually examples of Wired serving two different audiences? They can have something inquisitive and well-constructed next to pieces where you ask, “do they think I’m a brain-dead adolescent?” — at first I thought this was just normal editorial weakness, but then it seemed to have almost a pattern to it, as if they’re trying to satisfy the ADD-charged browser and the more traditional reader with the same book. That makes far more sense to me, frankly.