Flash Crash

Flash Crash

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Flash Crash

The Day the Machines of Wall Street Took Over

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Did the Flash Crash of May 6, 2010 Foreshadow the Last Apocalypse?

This is the way the world ends, Not with a bang but a whimper. -The Hollow Men (1925) T.S. Eliot

The poet T. S. Eliot had his own prophetic ideas about how the world might end but scientists have recently seriously speculated on what kind of events could wipe mankind from the universe.  Of course an untreatable epidemic is usually mentioned along with encounters with a rogue black hole or an asteroid like the one that killed all the dinosaurs.  But one interesting and unusual scenario that results in the destruction of all of mankind is the “Hal Scenario” in which machines of our own creation take over the world and destroy us all.  Could Eliot’s Hollow Men be machines?

Could this really happen?  Well personally I think it COULD happen and I think we need to look more carefully at what is being done with our “machines of the mind” today while we still have some control.

We may have had a taste of the “Hal Scenario” as recently as May 6, 2010. On that fateful day Wall Street experienced its first machine driven Flash Crash.  On May 6, 2010 the machines were, for a few terrifying minutes, in charge of the largest economy on earth.

On May 6, 2010 the financial world saw the entire US equity market collapse, and recover, in about 20 minutes.  Never in the history of US markets had price dropped so low and so fast.  On May 6, the day of  the Flash Crash”, more than 19 billion shares were traded across multiple markets and investors lost billions.

This is what it looked like on a chart (click to enlarge):

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Traders were numbed by the pace of selling and many froze like deer caught in the headlights of an oncoming truck.

At 2:20 p.m. EDT the Dow was down 400 points.

This was bad, but then the DOW fell another 600 points in just seven minutes, the fastest and largest drop in the stock market’s history.

One stock, Accenture, fell from $42.17 to 4 cents.

But the overall market did not stay down long and by 3:09 p.m., the Dow had regained 700 points. Prices continued to fluctuate wildly until the markets mercifully closed.

After the close traders walked around in a daze, with vacant looks in their eyes, not unlike soldiers who had just been beaten by a vastly superior and unseen enemy.

Flash Crash, “I think the machines just took over”

“I think the machines just took over. There’s not a lot of human interaction,” said Charlie Smith, chief investment officer at Fort Pitt Capital Group. “We’ve known that automated trading can run away from you, and I think that’s what we saw happen today.”

Was the flash crash a precursor to the Hal Scenario?

Initially the flash crash attracted some attention and President Obama commented briefly on the largest stock market drop in history.

But then the whole event seemed to disappear from the public consciousness.  Newspapers stopped running stories about it and three years after the flash crash the many government investigations have failed to explain what really happened.

But there have been some interesting rumors:

Machines can mimic human thought processes AND emotions through a process dubbed by some as Androgenic Syntactic Analysis or ASA.  ASA allows for a smooth conversion between the ways humans think and communicate into binary code which is the way machines and computers think and communicate.

Using androgenic syntactic analysis the most sophisticated aspects of human intelligence are converted into usable machine language where it can be parsed at lightening speed, networked and compounded.  “It’s like taking 100 of Einstein’s brains, networking them, and then having them capable of outputting a life time of Einstein’s ideas in a millisecond” said an unidentified source alleged to be close to the government investigations.

I have been unable to verify any of this or for that matter establish the true source of this information.  I offer it here only to stimulate discussion of the role (and danger) of machines in our society.

But IF it were true it might suggest that the Flash Crash of May 6, 2010 was a precursor of the Hal Scenario and that for a few terrifying minutes the machines had total control over the American economy.  Furthermore the machines might have thought about and knew what they were doing.

Or perhaps it was just a mistake made by the programmers of these machines, a case of the research animals briefly escaping from their cages and raising a little hell.

Or perhaps it was just aberrant market behavior or random market theory on steroids.

I have argued that machines can understand Wall Street whereas the human mind cannot. Furthermore I have suggested that traders should not try to make subjective stock trading decisions, but should let their computers do the thinking for them.

We traded through the flash and crash with our computers running hot and we emerged more or less unscathed.  But perhaps we were just lucky.

But regardless of whether or not you buy into the possibility of the “Hal Scenario” I think it is clear that thinking machines are alive and well on Wall Street and these thinking machines can and will at times take over our markets.

And if robots are running Wall Street you are going to need a robot if you want to make money!  I hope the Flash Crash taught us something.

 Copyright 2010-2015 Short Term Stock Trading        

 

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I am a trading system pro and have been trading markets and have been involved with trading system development and the programming of trading system software for 25 years. “Today Stock Market” is my opportunity to share with you some of my trading experience while discussing stock market news and giving my daily stock market update.