Are you one of those people who might, with the best will in the world, be called ‘slightly clumsy’? Do you find that things tend to fall off tables or hooks whenever you’re in the room? Do glasses slip, bottles fall, files crash off tables? Do you find that you have to repeatedly use the ‘backspace’ key when you’re typing, to correct the mistakes that even the spell-check can’t work out? Then if so, at least be grateful that you aren’t a city trader (or if you are one, please step back, very slowly, from your computer, sit down, and wait for someone to accompany you from the building). We have all seen the effects when ‘fat thumbed’ dealers have pressed the wrong button, or added an extra zero, or gone for ‘sell’ when they thought they were going for ‘buy’ – and so far the damage has been limited to a few red faces and a rough time explaining to the board why this year’s profit has been wiped out by a ‘rogue deal’. But the increasing use of fully autonomous trading programmes (High Frequency Traders – HFT), able to respond to market changes in thousandths of a second, means that any one particular mistake, or unforeseen interdependence, can lead to cascading consequences that will reverberate around the world before anyone can possible assess that a mistake has been made, or say ‘Do you really want to do that’. And as we saw in the first financial crash of 2007, once the genie is out of the bottle, it cannot be put back, the video can’t be rewound, no-one can say ‘Oops – can I try that again please’.
The news that the US banking commission is going to investigate the increasing use of automated dealing programmes that react in split seconds to the changing stock prices was something I had been waiting for many months. My ‘Fact of the year’ of 2013 was that when the New York stock exchange crashed, it turned out that the dealers in New York were complaining because other dealers (who were paying handsomely for the privilege) were receiving their information seven thousandths of a second before they were – and that was enough to ensure that they had a dealing advantage that allowed them to take advantage of market movements before anyone else.
The ‘Flash Crash’ of 2010, when the Dow Jones Index lost ten per cent of its total value in a few minutes, was one example where closed feed-back loops meant that different HFT programmes were buying and selling the same contracts to each other in a ‘hot potato’ effect. To put it into context this video of a half-second of trading slowed down to five and a half minutes shows how little control of any of the transactions is possible.
However, we know the problems that are associated with financial crashes, and given that we’ve seen what happens when the bankers put the whole world at risk in order to maintain their own short-term bonuses, surely we aren’t going to allow that to happen again…. Especially as, given the competitive need to ensure that you yourself are the ones gaining the extra thousandths of seconds advantage, it will be ever-more tempting to cut out the security management checks that could act as a buffer to those trades being carried out.
So, you can imagine my relief when it came out that no, it will not be left in the hands of rapacious traders to decide how close to the edge they can go (and the answer to that, of course, is always ‘Just a bit closer…..’). The ultimate US trading regulator, the Securities and Exchange Commission’s new chair, Mary Jo White, announced at her confirmation hearings in March 2013 that HFT was high on her agenda. And meanwhile, in case you were wondering what has been done, the answer is nothing. In fact, one of the main HFT regulation research programmes has been closed down because it was infringing on privacy laws.
Many people reading this will be aware of Charles Perrow’s work concerning ’Normal Accidents: Living with High-Risk Technologies’. Normal Accidents are inevitable institutional failures arising as a consequence of the interaction of complex structures, especially in what should be high-risk, high-impact High Reliability Organisations. According to Perrow, prior to the Big Bang coincidence of effects that leads to total and catastrophic breakdown, there are a series of Normal Accidents that are both precursors to the final annihilation and the indicators of the internal weaknesses that will inevitably lead to them. It doesn’t take a financial genius to be aware of the stories about technical breakdowns in a wide variety of global finance and trading programmes. Next time you see a connected story, you might just wonder whether that is the signal that the Big One has just moved one step closer – and you might also wonder what exactly the people who can do something about it are actually doing.
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