13 - Finance Takes Flight
Published online by Cambridge University Press: 18 January 2024
Summary
The Frankenstein story – the monster that bursts out of the laboratory and pursues its creator – is firmly embedded in our collective imagination. The novelist Robert Harris gives it a spin in the Fear Index, published in 2011. His monster is an artificially intelligent trading algorithm launched by a Geneva-based hedge fund. It is fantastically, malevolently intelligent, able to penetrate secret files and to discover the worst imaginings of its designer, to conduct a reign of terror through purchase orders and contracts. As its creator attempts to burn down the servers that house it, the algorithm uploads itself into the digital netherworld where it roams free, doing as its code instructs: feeding on fear for financial profit.
Harris’ fictional financial cataclysm echoes a real one that took place on 6 May 2010. Where the collapse of the late 1980s was strung out across several days, this one was wrapped up in an afternoon. A wobble in the US markets, and then a spectacular tumble: the Dow Jones losing 998.5 points in 36 minutes, a trillion dollars of capital evaporating in 5 minutes. This was the ‘Flash Crash’. There was no panic, no shrieking or shouting. The whole affair was conducted algorithmically, as high-speed trading machines performed the electronic equivalent of yelling ‘Sell! Sell!’, unloading stock to each other at ever-falling prices. Algorithms do not panic, but they do form expectations, and they do so in thousandths of a second, creating a self-fulfilling cyber-crash. Circuit-breakers – automatic cut-outs designed to stop the market self-destructing – halted trading. When trading restarted, prices climbed quickly back to the morning’s levels. Although individual traders may have made or lost fortunes (we don’t know – and Harris deftly weaves fiction into the gap), very few ripples spread into the wider economy.
An initial investigation found that a large sell order had triggered the flash. There was a veiled reference to a problem with the timing of data feeds, a technical, structural problem. But international law enforcement officers turned up in London to arrest a man the media soon dubbed the ‘Hound of Hounslow’.
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- Information
- How to Build a Stock ExchangeThe Past, Present and Future of Finance, pp. 145 - 155Publisher: Bristol University PressPrint publication year: 2023