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.