Rogue Computer Algorithms Threaten Stock Markets

By Stuart Fox Posted 01.26.2010 at 2:58 pm 9 Comments

Tokyo Stock Exchange Stefan, via Flickr.com

Computer intelligence is getting more human every day. They solve problems like humans, they communicate like humans, and now, they're ruining the world's financial markets just like humans. NYSE Euronext, the trans-Atlantic regulatory body that monitors stock trading, has fined Credit Suisse's trading division for failing to monitor a computer trading algorithm that misconducted hundreds of thousands of stock transactions.

According to the Financial Times, algorithms handle 60 percent of trading in the equity markets, with little or no human oversight. The problem is already bad, and getting worse. Earlier this month, a malfunctioning algorithm accidentally traded 200,000 futures contracts to itself. And last year, the London Stock Exchange shut down after a rash of computer-generated orders overwhelmed the system.

Frederic Ponzo, a managing partner at GreySpark Partners, a consultancy, told the Financial Times that, "it is absolutely possible to bring an exchange to breaking point by having an 'algo' entering into a loop so that by sending them at such a rate the exchange can't cope."

And if that wasn't bad enough, Financial Times also notes that, "regulators say it is unclear who is monitoring traders to ensure they do not take undue risks with their algorithms."

Just over a year ago, it took a flesh-and-blood human to mismanage financial risk so badly that the world's entire economic system cracks at the foundation. Now, we've got a computer to do it. That's what I call progress.

[The Financial Times, via IEEE Spectrum]

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9 Comments

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caradoc01

01/26/10 at 3:52 pm

all it would take is a couple of "patriotic" chinese hackers to crash western financial markets...geez did I say that out load...oops

stuff like this makes one think just how badly we need a cyber corp to protect our cyber interests

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finitesolutions

01/26/10 at 4:19 pm

Chinese or anybody else will break your systems when they posses better technology. Protecting old systems is counterproductive. Upgrading/replacing them is better plus it generates more business.

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caradoc01

01/26/10 at 7:40 pm

With Clinton we had to also protect ourselves from his horrid choice in women

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Meshca

01/26/10 at 7:45 pm

@KH. that comment was great.

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KWade85

01/26/10 at 9:04 pm

While some regulation for this type of trading is definitely needed, the last sentence is complete paranoid hype.

Algorithmic trading was developed in the 80's and 90's and has been responsible for a huge percentage of trading since the early to mid 2000's. It's not like this wasn't around last year or before the recession, so there's no reason to make comments that suggest otherwise in order to scare people into thinking this will be the cause of the next big meltdown.

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nicholasjh1

01/27/10 at 1:45 pm

@KWade85 You are absolutely right, and in fact the algorithmic trading leading up to 2008 helped create the bubble and cause the crash.

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herkeden1

09/13/10 at 1:42 pm

With Clinton we had to also protect ourselves from his horrid choice in women games

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ryannewman

10/01/10 at 11:11 pm

This is nothing new, at least not the concept. Computer errors have been snarling the world stock exchanges almost since they first started being computerized. Relying on a computer to handle the intricacies of a fluid and chaotic system like the stock market is like expecting your cruise control setting to navigate your car through a Tokyo traffic jam.

www.scootek.co.uk

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MaXTraDBS

11/30/10 at 10:33 pm

Maybe these aren't accidents. Maybe Skynet has figured that killing our economies and driving us into starvation would be a lot easier than constructing a robot army to wipe us all out.