Lesson of today's stock market plunge: Speed kills
Image by artemuestra via Flickr
Here, I'm talking about what "Terminator" fans would call the Rise of the Machines: automatic, untouched-by-human-hands trading.
Veteran trader Mark Fisher -- who never appears on CBNC -- came on tonight practically begging for someone, anyone, to slow this thing down. He looked scared and for good reason: he knows what's going on on the trading floors and he says it needs to get the brakes put on it, pronto.
"I came on TV because as someone who's been doing this for over 35 years I think this is a warning," Fisher said on CNBC. "I think what we saw on (Thursday) is just the tip of the iceberg. There is no way this isn't going to happen again and again and again unless we can slow the process down.”
As an illustration, he told a CNBC host to tap her finger on the desk in front of her. A highly sophisticated computer-driven trading desk could make 10,000 buy-and-sell orders in the time it took for her to tap her finger on the desk. Yes, we're talking about thousands of trades in seconds.
Markets have invented these computers to efficiently speed the flow of capital around the globe and to give their trading houses millisecond advantages over rivals, which can translate -- when thousands of trades are involved -- into millions of dollars in profits.
This need for speed is nothing new. European traders 200 years ago used carrier pigeons to transfer trades, because they were faster than horses. One of the first uses of the telegraph was to speed trades.
But those advances increased human trading by factors of two, three or maybe 10. Now, the computer algorithms have increased human trading by factors of 1,000.
I've written before about high-speed trading, sometimes called "flash trading." That in itself is not the problem.
The problem is that traders move in herds and computerized trading allows them to move in massive herds at high speeds and make wild swings. That can cause wreckage like we saw today. Speed is a force-multiplier, as the armed forces would say.
Think of it this way: Imagine you're one guy on a skateboard and you take a corner too fast. You fall over. Maybe you skin a knee. Now, let's imagine you're driving a super-charged bus full of people at 200 mph and you're heading toward a corner. One hundred other bus drivers see you and fall in behind. What happens now when you take that corner too fast? The engine was too much for you to handle and the lot of you go over the cliff.
Fisher, the trader, was begging for the Commodity Futures Trading Commission to put the brakes on the system. He warned this can happen any time the machines are in control. You can be certain that the day's turmoil caught the attention of Democrats on Capitol Hill and in the White House who are eager to reform the financial system.
Billions and billions of dollars in capital was wiped out, literally in seconds Thursday. And that's not just esoteric money being shuffled around by hedge fund managers. That's your 401(k), your portfolio, the investments your pension fund depends on. If you regularly check your 401(k) online, you will see the result of today's carnage. And that's especially galling, considering we've been made steady progress toward recouping the losses inflicted by the financial crisis.
Follow me on Twitter at @theticker.
May 6, 2010; 8:38 PM ET
| Tags: Business, CNBC, Commodities and Futures, Commodity Futures Trading Commission, Investing, Mark Fisher, Trade, Twitter, Wall Street, dija, dow jones, dow jones industrial average, dow jones plunge, european debt, greece debt, greek debt crisis, nasdaq, proctor and gamble, s&p 500, stock market plunge, stock market today, wall street
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