The flash crash of 2:45

The flash crash of 2:45
Over 70% of the US stock market is now traded by algorithms; mathematical formulae that talk to one another to optimize financial transactions. Two thousand physicists are employed on Wall Street to support this Black Box trading (aka algo trading) and yet in 2010 something happened that no-one could control. In just five minutes, 9% of the value of the stock market ‘dissappeared’ in what’s known as the flash crash of 2:45. Algorithms are so dominant, that their interactions can’t be read or controlled, other than by a big red button marked ‘Stop’. A further example of a loop in trading patterns occurred when an out of print book called ‘The Making of a Fly’ was up for sale on Amazon at $1.7m and rose to $23.6m without a single purchase.
Because these formulae run on computers, they process new information extremely fast and as they dominate the market, this also moves like lightning. A new 825 mile fibre optic line from New York to Chicago, has been laid to shave just 3 milliseconds (ms) off the previous digital round trip time of 13.3 ms, which is itself five times faster than the click of a mouse. An illustration of the value of fast service to black box trading, is the plan to install computer servers at the optimum distances between the financial markets worldwide, including prime real estate in New York and potential mid-ocean locations.
Decision-making algorithms are here to stay and we need to evolve alongside them. Fast.
© orlando kimber
Image: ‘Waterloo Dogs Playing Poker’ by Cassius Coolidge
Please note, page layout may differ on individual readers.