Econopocalypse scenario #3654: the Fat-finger Collapse

Ars Technica has an interesting article about a couple of recent stock-market glitches caused by high-frequency trading algorithms run amok. Long story short: a screw-up at Credit Suisse was caused by “a trader who accidentally double-clicked an icon in a trading program’s interface, when he should’ve single-clicked.Yipes.

OK, so it’s not quite the same as a tired technician leaning on the nuclear launch button by accident, but given the utter dependence we have on the instruments of high-speed high finance, similar mistakes could cause global catastrophes. [image by Coffee Maker]

The problem is connected to so-called “day-traders”, computer-assisted stock deals that occur in the blink of an eye, often without much human interaction, and minor errors are amplified at the speed of light (or at least the speed of data in optical fibers) by the networks, causing fluxes that folk like you and I never notice, but which cost bankers and investors thousands of dollars in losses and fines…

Of course, the fact that such computer-driven volatility hurts day traders matters little to long-term investors. But the fear is that these glitches are fleeting indications that the system as a whole is vulnerable and unstable, and that the right combination of circumstances could cause what happend to RMBS to happen on a wider scale. This is especially true as even more of the trading activity, even among individual traders, shifts to automated platforms.

However, it’s not all doom and gloom; the last few years have seen a sharp increase in small trading firms of the two-guys-and-a-fast-computer type, small independent operators using the same techniques as the big banks to trade automatically through the blind of commercially-available trading software.

The Obama administration’s efforts to rein in high-frequency trading by eliminating flash orders and banning proprietary trading (much of which is HFT-based) from large banks will probably have the effect of leveling the playing field a bit for these smaller algo shops. As Matthew Goldstein at points out in his Reuters article on the topic, the prop desks may disappear, but the software and expertise will not. Instead of being concentrated at a few large banks, algo trading will just spread, as the talent behind it either jumps to new funds or goes solo.

Once again, the network corrodes hegemony… but whether a world where anyone and his dog can engage in automated high-frequency wheeler-dealing will be a safer, better and richer one remains to be seen.

2 thoughts on “Econopocalypse scenario #3654: the Fat-finger Collapse”

  1. This isn’t the first time that a trader’s error with software has caused a major loss: is another example. There, the user planned to sell 1 share at 610,000 yen, but typed it backwards, selling 610,000 shares at 1 yen. It will continue to happen, and I don’t consider this scenario to be that far off.

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