Computers Blamed (Again) for the Market's Woes

More

As the Dow has yo-yo'd through the past week, a familiar criticism has risen from the crowd. It's the computers fault!

Take this article from ABC, "High-Frequency Trading May Magnify Market Woes," in which the author leads with the idea that "experts believe that computer-driven high frequency trading is partially responsible for accelerating stock gyrations."

It's not that algorithmic trading couldn't have negative repercussions like last year's flash crash, but we know that there are so many human factors driving the markets crazy that we need real evidence for algorithmic hijinks before we should blame the bots. People like to scapegoat computers when the market starts doing things that are beyond any human's ability to tell a plausible story about. Dow down! Dow up! Dow down! Dow up! It must be the computers' fault!

Blaming computer-assisted trading has been a go-to strategy to explain market dips since the October 1987 market crash. "This computer-assisted trading trading has been credited with helping feed the remarkable run-up in stock values that began in 1982," the AP wrote days after the crash. "But in the wake of Monday's historic 508-point plunge in the Dow Jones Industrial average, the technique was being viewed as a destructive force." The Miami Herald was less measured; its headline read, "Computers Bring Doomsday to Wall Street." Even technology evangelists like the ones featured in the video above take it for granted that computerized trading might one area where computers were dangerous.

A lively and still unsettled academic debate ensued about the role of algorithmic trading, or program trading*, as it was then known, during the crash. Did it cause or exacerbate or have no effect on the market collapse? Various investigators told different stories with different data, as summarized nicely in a 1989 paper by Dean Furbush. "There is still no consensus as to the role of program trading in the crash."

In the popular imagination, though, computers certainly played a role in the crash. In 1988, the New York Times wrote, "The story of last October's stock market crash featured one notorious villain: program trading." The Times also noted that the practice hadn't gone away. In fact, computerized trading strategies have only become more prevalent over the 24 years since that crash.

Now, computers execute something like 75 percent of the trades on the major exchange, and when the markets are running smoothly, they seem to have a salubrious effect. But as a generally positive academic paper on the computerized practices concludes, "it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets."

Whatever the reality of the situation, when all hell breaks loose, we don't really trust the machines. We want some wet, sentient mammal eyes staring back at us when the bad times come. We want traders who feel pain. Like these guys, courtesy of The Atlantic business team:

And yet here's what 80 percent of the trades really looked like, so it's about time we stopped relying on romantic or nostalgic notions about human traders.

*Furbush, for one, goes to great lengths to state that 'program trading' strategies antedated computerized trading, but I think for most of our purposes, the terms can be used interchangeably here.

Jump to comments
Presented by

Alexis C. Madrigal

Alexis Madrigal is the deputy editor of TheAtlantic.com. He's the author of Powering the Dream: The History and Promise of Green Technology. More

The New York Observer has called Madrigal "for all intents and purposes, the perfect modern reporter." He co-founded Longshot magazine, a high-speed media experiment that garnered attention from The New York Times, The Wall Street Journal, and the BBC. While at Wired.com, he built Wired Science into one of the most popular blogs in the world. The site was nominated for best magazine blog by the MPA and best science website in the 2009 Webby Awards. He also co-founded Haiti ReWired, a groundbreaking community dedicated to the discussion of technology, infrastructure, and the future of Haiti.

He's spoken at Stanford, CalTech, Berkeley, SXSW, E3, and the National Renewable Energy Laboratory, and his writing was anthologized in Best Technology Writing 2010 (Yale University Press).

Madrigal is a visiting scholar at the University of California at Berkeley's Office for the History of Science and Technology. Born in Mexico City, he grew up in the exurbs north of Portland, Oregon, and now lives in Oakland.

Get Today's Top Stories in Your Inbox (preview)

The Death of Film: After Hollywood Goes Digital, What Happens to Movies?

You'll never hear the whirring sound of a projector again.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

The Death of Film

You'll never hear the whirring sound of a projector again.

Video

How to Hunt With Poison Darts

A Borneo hunter explains one of his tribe's oldest customs: the art of the blowpipe

Video

A Delightful, Pixar-Inspired Cartoon

An action figure and his reluctant sidekick trek across a kitchen in search of treasure.

Video

I Am an Undocumented Immigrant

"I look like a typical young American."

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Writers

Up
Down

More in Technology

Just In