Sunday, June 05, 2011

The Solution that Became the Problem

Why did this 1971 brokerage ad deal with such dull subjects as error-reduction and bookkeeping? Because all heck had broken loose at brokerage firms in the late 1960s. As "gunslinger" fund managers snapped up hot stocks at unprecedented rates, antiquated back offices collapsed under mountains of paper.

"Wall street in 1968," wrote John Brooks in The Go-Go Years,  "…cut its own throat through its complacency, greed, and lack of foresight."

Can't have been pretty in 1971, either. Some formerly hot stocks plunged 40 percent or more as the gunslingers ran for the exit.

Computers eventually solved the problem. A 20-million-share day may have shook Wall Street back then. Now a one-billion-share day is routine.

But the 20th-century solution has bred a 21st-century hazard. Wall Street finds itself under attack by program traders wielding metaphorical death rays rather than Colt revolvers. This week's 60 Minutes devoted a segment to How speed traders are changing Wall Street.
Most people don't know it, but the majority of the stock trades in the United States are no longer being made by human beings. They're being made by robot computers, capable of buying and selling thousands of different securities in the time it takes you to blink an eye.
 Should computers telling other computers to execute zillions of instant trades worry you? Yes, according to a current and a former senator. See Preventing the Next Flash Crash.

The marketing question is, does program trading worry investors? Do they feel threatened by the prospect of a major flash crash?

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