Machines are in Control

We have been talking here for a while about the perils of automation. Yesterday a “rogue computer algorithm” almost crashed the whole stock market.

“The machines have taken over, right?” said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital markets consulting firm. “When events like this happen they just reaffirm that these aren’t investors, these are traders.”

The errant trades began hitting exchanges almost as soon as the opening bell rang and came from a single New Jersey broker that specializes in computer-driven trading, the Knight Capital Group. Shares of more than 100 companies, including big names like Alcoa, Citigroup and Ford suddenly spiked up or down.

One has to ask the question of whether these “robots gone wild” are distorting the whole purpose of the capital markets to such an extent that we have to re-imagine the stock market. The first and most obvious move is to treat short term capital gains (stocks held less than one year) as ordinary income for tax purposes. I believe this would slow down the High Frequency trading, which has turned Wall Street into a casino that is unfriendly for long term investors.

Obviously the implications of “lights out algorithms” in many other fields are equally troubling. I have mentioned how ad networks are using algorithms to place ads on Pirate Networks in a way the advertiser never intended. Of course all of this bad conduct could be stopped. We just need to wake up before the computers start really causing havoc.

 

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11 Responses to Machines are in Control

  1. len says:

    We just need to wake up before the computers start really causing havoc.

    “We’re buying two hours for $250 million.”

    http://weburbanist.com/2011/11/20/global-warning-the-arctics-abandoned-dew-line-stations/

    Well… maybe.

  2. JTMcPhee says:

    @len

    “The only way to win is not to play the game.”

    “buying two hours,” meaning of course for those who missed all the fun, two hours or maybe one or less of “warning,” for our Necessarily Insane Leaders and Generals to activate the whole enormous ponderous error-prone false-positive spindizzy Football-triggered monstrosity, and release all the weapons in the US Nukular Triad, ensuring the triumph of MADness. Cuz by God Almighty, if them Rooskies started something, by the Blood of the Son of the Living God we were damn sure going to finish it.

    Makes you wonder what the saurians thought, or felt, as the K-T event caught them up. Do dinosaurs pray to a scaly god?

  3. len says:

    I was told once there was no intention of warning the public because the risks of people on the road were greater than them being in their homes.

    But the DEW line story is there to emphasize part of Tap’s example: latency time is now reduced to nanoseconds and combinatorics and very short reaction time can create a very big mess before the meat can do the right thing. There is a story about the Thule Greenland installation where a radar echo off the moon was interpreted as incoming. The reason for not launching was a launch officer who simply didn’t accept it. After that, systems became more automated but it still required multiple authorizations and launch on warning was disabused.

    One would want to see better risk assessment in systems design and not the “we have the web and we build it and fix it until it works”. Agility in the face of high risk is not necessarily a face saver or an economy preserver.

    As far as the relationship to trading, that should be taxed until it can barely breathe. My question to those who object is what value is actually produced (other than faux money) by extremely high transaction rate trading to the economy? This isn’t my field but it has the feel of kids huffing glue or choking themselves for short burst highs. Our technology is overdriving our headlights and becoming because of the addictive nature of easy communications and the fast money made parasitic.

    We are in a cycle, fielding wise, of ready shoot aim. The web was fielded witlessly and by, as Alan Kay says, amateurs.

  4. JTMcPhee says:

    @len
    It wasn’t just the bounce off the moon that got all of us close to the edge of “some say the world will end in fire…” Google “dew line false warnings” for a whole load of near-hits. We create these vulnerabilities, with some real full-stop dead-end over-the-cliff endpoint possibilities, and all for what, again? Is the cottonmouth really dead? Let’s go up and poke it with a little short stick and see…

    Watch out for those “rogues,” who are well known to anyone close to the bidness.

  5. Fentex says:

    I think you again conflate separate issues; tying an understandable dislike for share trading that destroys the concept of productive investment to your argument about advertising funding theft.

    That these two things have computers in common does not make them the same.

    Almost everything in our lives now has computers in common so every time someone points to algorthims and automation and calls it a problem it will not be hard to point to a useful tool (MRI’s for example) as a counter-example.

    Turning investment into trading is a bad thing, computers or not.

    Your arguments that supporting piracy with advertising is a bad thing can stand on its own, computers or not.

    If these positions don’t stand on their own just attaching ‘because of computers’ to them does not make them logically or morally stronger arguments nor makes them the same argument.

  6. Fentex says:

    As far as the relationship to trading, that should be taxed until it can barely breathe.

    I’m not so sure. I think there’s a more fundemental problem with sharemarkets that is exacerbated by legislation and regulations that treats them as important beyond buyer and sellers individuals evaluations.

    Sharemarkets represent ownership of a minority of the business that occurs in countries yet interest rates and investment regulations are keyed to them concentrating attention and forcing finances to seek them out producing a unhealthy concentration of attention and capital.

    Governments should not regulate with any reference to share markets (as they now do with things like requirements on institutions holding certain proportions of certain rated securities).

    And possibly all capital transactions, like labour transactions, should be considered income.

  7. Fentex says:

    And as a matter of interest, for the ongoing topic of copyrights and their enforcement, have the copyrights for the image heading this article, now copied to and hosted on the jontaplin.com domain, been properly assigned from the holder of it’s copy rights?

  8. Rick Turner says:

    The “Interregnum” is a time when almost by definition, the old rules are so suddenly abrogated that there is no way that some (many?) deserving folks playing by said “old rules” will NOT get utterly screwed. Play by the old rules, get screwed by the new…rules? Well, there aren’t any… Yet, “meet the new boss, just like the old boss”. And those of us who are unfortunate enough to be born into an Interregnum will wind up almost randomly strewn to one side or another of material success. I’m about in the middle of it all. Getting by, no disaster warnings on the DEW line. Not doing great, though, but not bitching too much about it either. Hope springs eternal, and all that…

  9. len says:

    @Rick Turner

    If I accept the wisdom of the early morning pundits, the new rules are buy less, expect less, have more money. The new ideal is Canada.

    For that reason alone, we must invade our neighbor to the north and …. lose.

  10. T Bone Burnett says:

    Fentex :
    And as a matter of interest, for the ongoing topic of copyrights and their enforcement, have the copyrights for the image heading this article, now copied to and hosted on the jontaplin.com domain, been properly assigned from the holder of it’s copy rights?

    We’ll file this under the heading of blind guides, straining out a gnat and swallowing a camel.

    I think we’ll call that fair use and your joke, a fair joke.

  11. Dear Jon,

    The problems with high frequency trading are systemic:
    * Deregulation enables banks to apply huge financial leverage on their trading desks
    * Nasdaq has made it legal to for market makers to front run other customers with HFT
    * Nasdaq has abandoned its role as a market maker and regulator in favor of a model comparable to the NRA: they are an association of banks that exploit the market making rules for their own profit

    You can’t fix this with taxes. You have to re-regulate.

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