May 07, 2010

Sometimes Being Clever Isn't Smart

Fires have to start somewhere: they require a point of ignition. Every explosion -- even a hydrogen bomb -- requires a little bomb to set off the big one. In the case of the H-bomb, in fact, there is an igniter that blasts TNT that blasts an A-bomb that blasts an H-bomb that ruins the day for everyone nearby. Yesterday something happened to drop the Dow 900 points in six minutes. We don’t yet know exactly what was the igniter for that market implosion, but it likely was a computer glitch -- a $1 trillion computer glitch.

 
 
 
Whatever the glitch was, it happened and trading programs, trying to sell out from under what they perceived to be a market crash, dutifully began to liquidate. Before any human even knew it the market was crashing, though for no good reason.
 
 
 
 
From a technical standpoint this event reminds me of when the Strategic Air Command first fired-up the DEW Line radar network in 1958 to find a huge wave of Russian bombers apparently flying over the horizon. Those bombers turned out to be the rising Moon -- something SAC programmers had failed to tell their command and control computers even existed. Then, too, calmer heads -- human heads -- prevailed, calling back a U.S. response that was already in the air, headed for Moscow.
 
 
 
 
Yesterday’s market event comes down to a differentiation between being clever and being smart. The program trades are clever -- they respond almost instantly -- but they aren’t very smart. A trader on his or her first day of work would be smart enough to know something was wrong when Accenture appeared to be selling for a penny. But computers are dumb.
 
 
 
 
Yesterday stands as a metaphor for the market as a whole in the last decade, when clever substitutes for smart and size trumps sense. When too big to fail means too big to even care, something has to give.
 
 
 
 
And that brings us to yesterday’s other events -- civil unrest in Greece that sent tremors through not just markets but through the rest of Europe. This reminds me most of the Revolution of 1848 -- class warfare that swept across Europe that year toppling monarchs and creating republics. That revolution, too, came about in response to the relentless pressing of advantage by the upper class combined with new communication technologies that spread the word quickly as government after government fell -- yet another trend about which the trading computers probably know nothing.
 

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Robert X. Cringely is Adam Smith’s sidekick.  The 12th employee of Apple Computer, Cringely has been making or writing about high-tech history since 1977.  He was field editor at InfoWorld, a computer industry trade paper, from 1987-95.  His best-selling book Accidental Empires: How the Boys of Silicon Valley Make their Millions, Battle Foreign Competition and Still Can’t Get a Date was published in 18 languages.  His PBS documentaries, including Triumph of the Nerds and Nerds 2.01: A Brief History of the Internet, have been shown in more than 60 countries. A blogger since 1997, he has 300,000 weekly Internet readers and more than a million words in print. A former columnist for Worth and Inc magazines, Cringely has written for Forbes, NewsWeek, MIT Technology Review, the New York Times and many other publications.  The companies he has helped to start have a market cap in excess of $500 billion.

Take a look at the Yen on the 6th and the BOJ announcement that they are pumping 2 trillion Yen into the banking system.

While there may be many instances of rating agency judgement swayed by the self-interests of the "I" banks which engaged those agencies, the major problem is the belief that the past is always an accurate, reliable indicator of the future. Obviously not always!

Thanks for the article. In fact, thank you for all your articles! Much enjoyed. Slightly off topic, but very much like your SAC o' DEW story, here's a link to the frightening wikipedia entry on Stanislav Petrov of the Soviet Air Defences who is generally credited with NOT starting WWIII, especially when they were on high alert to expect a first strike during the Able Archer excercise, and especially when most others in his shoes would have done the 'safe' thing and followed procedure. This guy deserves a thank-you card. http://en.wikipedia.org/wiki/Stanislav_Petrov

Thanks for the article. In fact, thank you for all your articles! Much enjoyed. Slightly off topic, but very much like your SAC o' DEW story, here's a link to the frightening wikipedia entry on Stanislav Petrov of the Soviet Air Defences who is generally credited with NOT starting WWIII, especially when they were on high alert to expect a first strike during the Able Archer excercise, and especially when most others in his shoes would have done the 'safe' thing and followed procedure. This guy deserves a thank-you card. http://en.wikipedia.org/wiki/Stanislav_Petrov

Here we are one week after what is being called the 'Flash Crash', the biggest intraday decline in history, and no explanation. The ‘fat finger’ explanation of hitting b (billion) for an m (million) has been dismissed, so either they don't know, or they are not saying. Which do you believe? Either way, there's a huge story here with absolutely colossal implications for someone to uncover. The integrity of the NYSE is at stake, and everything it touches, which IS EVERYTHING. How can the market drop a thousand points in a few minutes and rebound just as quickly? Personally I’m wondering if the exchange was hacked and they have yet to uncover how it was done, hence the position of not saying anything … yet. Just a guess. Hope I’m wrong. Other theories include market manipulation, human trader error, and a confluence of computer automated trades among others.

Here we are one week after what is being called the 'Flash Crash', the biggest intraday decline in history, and no explanation. The ‘fat finger’ explanation of hitting b (billion) for an m (million) has been dismissed, so either they don't know, or they are not saying. Which do you believe? Either way, there's a huge story here with absolutely colossal implications for someone to uncover. The integrity of the NYSE is at stake, and everything it touches, which IS EVERYTHING. How can the market drop a thousand points in a few minutes and rebound just as quickly? Personally I’m wondering if the exchange was hacked and they have yet to uncover how it was done, hence the position of not saying anything … yet. Just a guess. Hope I’m wrong. Other theories include market manipulation, human trader error, and a confluence of computer automated trades among others.

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