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Rogue computer traders lose $440 million – do computers have too much power?

Are we becoming too reliant on computers?  Have we taught them too much and do they now have the upper hand?  A new high frequency electronic trading platform launched by the New York Stock Exchange may have been proof that we’re losing control to machines of our own making.

It’s a scary set of circumstances that’s been repeated in countless sci-fi’s and spooky futuristic literature.  The computers we created to act as mere assistants and make our lives easier end up taking over the show, holding us hostage to their procedures or simply malfunctioning – leaving us to clean up the mess behind them.  This is a painful question the NYSE had to ask itself when Knight Capital’s new automated trading program lost it’s mind.  Using algorithms, trades are generated by the computers that will respond to activity on the trading floor and in some cases, market news from the outside world they receive in electronic format.  Of course humans continue to monitor the trades but with computers completing an estimated 165,000 separate trades in a couple of seconds it’s impossible to oversee everything they’re up to.  For the most part the system is highly effective, cheaper then employing additional teams of people and is able to match offers and buyers in a fraction of the time people are able to.  Speed, cost and the ability to work independently (and all night) are often the very reasons we create programs, devices and computers, the problem is when we can no longer control their actions.

Felix Salmon, finance blogger for Reuters said of the Knight Capital computer glitch that lost millions earlier this month – “We don’t know exactly what. They switched it on and immediately they started losing literally $10 million [£6.4m] a minute. It looks like they were buying high and selling low many, many times per second, and losing 10 or 15 dollars each time. And this went on for 45 minutes. At the end of it all they wound up having lost $440 million [£281m].”  It took forty-five minutes for human traders to get the system under control, restore order and put an end to the errant trading.  Precautions are being put in place to try and prevent this happening again – the addition of a ‘kill switch’ will stop rogue computer traders while not sending the algorithms into a frenzy and causing further confusion on the markets.  Mantara, the company that developed the program for Knight Capital certainly agree that a program with a mind of it’s own may not be the best thing.  “It’s certainly a wake-up call,” Mantara Chief Executive Michael Chin told the Los Angeles Times. Wall Street has become “so complex that some of the things you would think are so simple got lost in the complexity.”  It’s clear that if we don’t understand all the decisions being made on our behalf, we should probably not create systems this complicated?

This may be a long way away from the malicious, manipulative, self-aware robots of film and fantasy, but when we find ourselves struggling to reclaim what’s rightfully ours from machines that should be doing our bidding rather than the other way around,  the result is the same.  What happens when they manage to override the ‘kill switch’ created to stop them when they get out of control?  $440 million is a lot of money but it could have easily been more and with the world still recovering from financial meltdown, these computers could cause the next great depression.  Maybe all that messy shouting and waving should return to the stock market floor.  At least delinquent people can be fired.

 

 

 

 

 

 

 

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