Computers and the Stock Market

The incredible plunge yesterday in the stock market makes one wonder if we haven’t gotten our machines and equipment to work faster than we can think.  While the details are not yet clear it is obvious that there was some erroneous trading done.  In all likelihood it will probably emerge that there was no nefarious intent and more than likely no human error involved.  Those computers that work the trades do it now in nano seconds.  Unfortunately computers can’t “think” as we humans can. 

Computers can’t “sense” when something is wrong or just doesn’t add up.  All of us have been in those situations often in our lives where we can determine at a glance that something is amiss at work or home or with our cars.   We don’t know the cause or details but we know there is a an error or mistake someplace.  If you are filling your car with a 15 gallon gas tank with gas that costs $2.70 a gallon and you get a ticket from the pump saying you owe $112.00 dollars without even trying to do all the math you will instantly recognize that something went wrong and won’t just walk away assuming it was a valid transaction.

Those computers on the NYSE apparently got orders to sell and the market controllers had slowed things down a little to about 90 seconds per trade from the usual instantaneous transactional blur.  When that sell order came in to sell at “market” the computer looked for the next bid price.   There wasn’t one on the NYSE so it under the rules could look anywhere else.  In the case of P&G the last quoted price was 60 dollars and then the computer couldn’t find another price until it found one at under 40 dollars.  If a human had been handling that trade he would have immediately known something wasn’t right.  A large and reasonably well run company  like that would not drop over 33% in seconds unless there was a report its headquarters had been bombed or some similar outlandish occurrence.  But the computer has no discernment and it just plowed on doing what it was programmed to do.   They are wonderful machines but do need a human hand on the tiller.

There has been similar concern in the aviation industry of the last couple of decades with the advent of computers taking over the flying duties of the pilots more and more.  A pilot can tell when something is not right with the plane with the “feel” of the yoke or vibrations or tilt of a wing when he is connected to the plane mechanically with his hands and feet and can feel with his body and ear and see.  If an unexpected danger is encountered by the plane the computer will respond only if that specific set of factors has been programmed into its operating system otherwise it will proceed with its program.  Like and history teach us that just when we think we have seen it all something new comes along that hasn’t happened before.  The challenge will be to balance the convenience and safety of the computer with the ability of a human to intervene and take control when the odd happenstance occurs.

In the days of yore, a couple of decades ago they had “specialists” on the trading floor and they are the ones who controlled the trading on the NYSE and other exchanges.  If we were still using that system today then events of yesterday would never have happened.  The specialists would have immediately suspected something was amiss and halted trading or refused to confirm orders or orders until they figured out what was happening.  I mean Accenture went from 40 dollars a share to 1 cent in a nanosecond yesterday.  Clearly that couldn’t be possible and should never have occurred.  The big traders love these huge trades they make because they can profit off the smallest of margins by trading large numbers of shares then retrading them seconds later.

I have no problem with big guys or large trades but I believe we need accuracy over speed.  Actually I am pretty confident in the NYSE to sort out this problem and come up with a good fix.  It is in their best interest to do so.  Nothing like market discipline and profit motive to make people sharpen their pencils and roll up their sleeves to come up with the best answer to problems.  Maybe they need to slow things down a bit to allow humans to digest what is transpiring before moving on.  Perhaps they need to restore the specialists with a supervisory role in over seeing the market trades by sector and the power like they had before to slow things down even more or halt trading for a few minutes if necessary.  We can’t have repeats of what happened yesterday.

In the ancient days you often would take physical possession of the stock you bought. That is mostly unheard of today.  It was a good way to work the market I thought.  It made you realize you were making an investment in a company and not merely trading on a whim or rumor.  Those old bonds had the coupons attached right to them.  Every quarter you could clip off the next one and turn it in to the nearest redeeming agent and get your dividend check.  Thus the old adage about someone doing nothing but “clipping coupons”.  They were really set if that is all they did.  Today everything is in street name and the transactions are almost universally recorded only electronically.  Guess that is fine for many but not sure it enhances the quality of investment decisions.  It becomes too much like pulling one of those levers on a slot machine to hit the “buy” button on a self trading computer program.   http://www.olcranky.wordpress.com

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