Algorithmic trading is a frightening technology - use it at your peril.
At the ISACA conference on 10 September, I posed the question: “Is technology destroying the world?” There are countless examples from the earliest dawn of civilisation to illustrate the human race's knack for converting tools into weapons.
Hammers became cudgels, fireworks became missiles, trucks became tanks, airplanes became bombers, nuclear fission became nuclear bombs, e-mail became spam. I did point out that it was not all doom and gloom - I also illustrated the wide variety of technology innovations that make a positive contribution to the future of mankind.
The world is at greater risk from an error in an algorithm and the resulting flash crash than from a nuclear disaster.Adrian Schofield, manager, Applied Research Uni, Joburg Centre for Software Engineering
Two weeks later, on 24 September, at the IFIP World Computer Congress 2012, in Amsterdam, I listened to Professor Philip Treleaven of University College London's UK Centre for Financial Computing on the topic of 'Algorithmic Trading and Flash Crashes'. Be afraid! If any use of technology is frightening, this is it!
Back to basics
My simple understanding of economics is that the sustainability of human communities is founded on the ability to divide our labour - to share the skills and means of production to satisfy the needs of all. To overcome the challenges of large-scale barter, the use of currency (money... cash... moola...) was introduced, so I could exchange my five bucks-worth of potatoes for your five bucks-worth of software without you having to seek a buyer for the unwanted potatoes.
This simple process evolved into “trade” - the introduction of intermediaries, who should have been facilitators of the exchange, but who adopted the practice of profiteering from the efforts of others.
In the late 20th century, “traders” used technology to increase their capacity to earn “commissions” from their “trades”. This opened the door to trading in “derivatives” and other notional instruments, which no longer represented physical assets. From that door, it was a short step to trading “at the speed of light”, where the quickness of the algorithm deceives the watchful eye of the regulator.
There is no substance to this “trading”. It adds nothing to the production of one person for the consumption of another. It is the manipulation of the market to the benefit of the manipulators. Treleaven reminds us that the world is at greater risk from an error in an algorithm and the resulting flash crash than from a nuclear disaster. By the end of his presentation, I was convinced we should ban this form of trading.
It leads to the question of the role of IT in this scenario. Does the developer of a “solution” have a responsibility towards the use of the tool they have created, or is that responsibility solely in the hands of the user? If the creator discovers unethical or illegal use of their product, should they be compelled to blow the whistle?
It is unarguable that we use technology to extend human capacity to achieve performance way beyond our physical ability. Such extreme performance includes supersonic flight, space travel, stem cell biology, nuclear power... and algorithmic trading.
The wisdom of hindsight will decide whether these are beneficial to the future of our existence.