From the Financial Times, article on how all these incredibly fast automated systems are bringing us near a automated financial meltdown:
An explosion in trading propelled by computers is raising fears that trading platforms could be knocked out by rogue trades triggered by systems running out of control.
Trading in equities and derivatives is being driven increasingly by mathematical algorithms used in computer programs. They allow trading to take place automatically in response to market data and news, deciding when and how much to trade similar to the autopilot function in aircraft.
Analysts estimate that up to 60 per cent of trading in equity markets is driven in this way.
Concerns have been highlighted by news that NYSE Euronext, the transatlantic exchange operator, has fined Credit Suisse proprietary trading arm for the first time for failing to control its trading algorithms. In the Credit Suisse case, its system bombarded the NYSE’s systems with hundreds of thousands of “erroneous messages” in 2007, slowing down trading in 975 shares.
The case was far from isolated, say traders. CME Group, the Chicago-based futures exchange, is investigating a case this month where a trader in “mini” S&P Index futures contracts “inadvertently traded approximately 200,000 contracts as both buyer and seller”.
Last year, the London Stock Exchange suffered a three-hour outage after its trading system collapsed under the strain of a huge volume of orders. Some traders blamed the spike in volumes from algorithmic trading.
Frederic Ponzo, managing partner at GreySpark Partners, a consultancy, said: “It is absolutely possible to bring an exchange to breaking point by having an ‘algo’ entering into a loop so that by sending them at such a rate the exchange can’t cope.”
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http://www.ft.com/cms/s/84950872-09e5-11df-8b23-00144feabdc0,Authorised=false.html?_i_location=http%3A%2FSimilar article from Technology Review how something as mundane as the length of the computer cable can affect these systems, the shorter the cable the faster the message moves. In other words, big time financial moves are being determined by just a few nanoseconds here or there. The moves these systems are responsible have a much further reaching effect than anything the government does as A) the companies being traded are the ones who decide who is the government and B) the companies being traded have way more money than the government:
Today’s stock market has become a world of automated transactions executed at lightning speed. This high-frequency trading could make the financial system more efficient, but it could also turn small mistakes into catastrophes.
Just five years ago, automated trades made up about 30 percent of the market, and few of those moved as quickly as today’s trades do. Since then, however, automated trading has become much more widespread, and much quicker. Narang acknowledges starting his ultrafast group as a defensive maneuver when he began to notice faster traders eroding the performance of his medium-speed strategy. Now the medium-speed fund is adopting the techniques he developed in the ultrafast fund.
The Tabb Group, a consultancy based in Westborough, MA, estimates that high-frequency automated trading now accounts for 61 percent of the more than 10 billion shares traded daily across the numerous exchanges that make up the U.S. market. Tabb estimates profits from high-frequency trading in the first nine months of last year at $8 billion or more. With the rise of automation, the bulk of U.S. stock trading has moved from the once-crowded floor of Manhattan’s New York Stock Exchange (NYSE) to silent server farms run by exchanges and broker-dealers across the country: the proportion of all trades that the NYSE handles has shrunk from 80 percent in 2005 to 40 percent today. Trading is now essentially a virtual art, and its practitioners put such a premium on speed that NASDAQ has considered issuing equal 100-foot lengths of cable to the brokers who send orders to its exchange servers.
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http://www.technologyreview.com/computing/24167/Article on the other things that are increasingly controlled by automated, ai powered systems, even down to who you mate with in some cases like the systems that companies like Eharmony use to tell you who you're allowed to date:
n a world teeming with data, we ourselves become the math nerds' most prized specimens. Researchers at Aetna Health Care, Amazon.com (AMZN ), and many other companies are piecing together mathematical models of customers and employees. Some models predict what music we'll buy, others figure out which worker is best equipped for a particular job. For now, these models are crude, the digital equivalent of stick figures. But over the coming decade, each of us will give birth to far more fleshed out simulations of ourselves. We'll be modeled as workers, shoppers, voters, and patients. Some of the simulations will have our names and credit cards attached, perhaps a few genetic details. In others, our identities will be shielded. Many of these models will be eerily accurate and others laughably off mark. But companies and governments will use them all the same to predict how to sell us things, steer us clear of diseases, and ramp up our productivity. And yes, they'll try to use them to keep us from hijacking airplanes or detonating bombs.
This mathematical modeling of humanity promises to be one of the great undertakings of the 21st century. It will grow in scope to include much of the physical world as mathematicians get their hands on new flows of data, from atmospheric sensors to the feeds from millions of security cameras. It's a parallel world that's taking shape, a laboratory for innovation and discovery composed of numbers, vectors, and algorithms. "We turn the world of content into math, and we turn you into math," says Howard Kaushansky, CEO of Boulder (Colo.)-based Umbria Inc., a company that uses math to analyze marketing trends online.
The Dark Side
This industrial metamorphosis also has a dark side. The power of mathematicians to make sense of personal data and to model the behavior of individuals will inevitably continue to erode privacy. Merchants will be in a position to track many of our most intimate purchases, and employers will be able to rank us not only by productivity, but by wasted minutes. What's more, the rise of math can contribute to a sense that individuals are powerless, a foreboding that mathematics, from our credit rating to our genomic map, spells out our destiny.
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http://www.businessweek.com/magazine/content/06_04/b3968001.htmFor those of you who have forgotten about The Machine Stops, make sure to check it out:
http://www.doomers.us/forum2/index.php/topic,17465.msg224305.html#msg224305
