The ’10 Crash: The Rise of the Rise of the Machines Theory

Twenty-four hours have passed since the Dow’s 1,000 point collapse, though it didn’t take a full day before diagnoses came in. “Europe is obviously the issue,” the Economist said right as stocks were tanking. A few hours later, Citi’s rivals were whispering about a “fat-finger” error at Citigroup, whereby someone, maybe in Chicago, accidentally sold a billion Procter & Gamble stocks instead of a million. That made it onto CNBC; Barron’s called it the great fat-fingered debacle; there were several good references to the ultra-classic Simpsons episode “King-Sized Homer,” in which fat fingers is a plot point.

But could the biggest intra-day point-drop in Dow history be blamed on a sole digit? Not for long. Today the Journal has a good piece on high-frequency trading firms like Dave Cummings’ fictional-sounding Tradebot Systems. In the middle of yesterday’s chaos, they stopped trading, leaving “investors with fewer traders to take the other side of their orders.” The Times has a similar story, which opens by saying yesterday’s events were “years in the making, driven by the rise of computers.” However the afternoon crisis started, whether with a fat-fingered trade or not, “that jolt apparently set off trading based on computer algorithms,” writes The Times, “which in turn rippled across indexes and spiraled out of control.”

If you’re not sure about what those algorithms look like, a good place to start is the blog Zero Hedge (though it’s been intermittently down), or this Daily Show segment from Samantha Bee. “High frequency trading is the hottest thing on the market,” the trader and high-frequency expert Irene Aldridge told Ms. Bee. “The sky’s the limit. The possibility of returns are huge.” Interestingly, Ms. Aldridge was on CNBC last night to defend her line of business. “I think you have to also give credit to high frequency trading! Specifically to how quickly the market has recovered,” she said–although the post-fall bounce has not been entirely great. “It used to take days or months for the markets to recover.”

Alone, the firm Tradebot accounts for five percent–a 20th!–of the volume of this country’s stock market, and the relatively new world of high-frequency trading is said to make up for two-thirds or three-quarters of daily trading. “But what did you think was going to happen,” asks a post bylined by The Machines on, “when you invented the Turing Test?” The ’10 Crash: The Rise of the Rise of the Machines Theory