Your Daily Dose of Paranoia

by wjw on May 14, 2010

It’s been a week since Wall Street’s flash crash, when runamuck automated selling wiped out a tenth of my retirement fund— and, somewhat less importantly, a trillion dollars of assets worldwide. The stocks have come back, but what I find interesting is that no one’s actually found what triggered the manic selling. They seem to have ruled out mistakes by traders, so the whole “fat finger hypothesis” has been ruled out.

We are left with the rather obvious notion that Computers are Stupid. It’s not a new idea. In Hardwired, written all the way back in the early 80s, I showed how automated stock trading systems could be stampeded into a stock panic.

Not that all those quants on Wall Street listened to me. They failed to learn the most important lesson of all: that I am smarter than they are.

No, that’s not the real lesson. (Well, yes it is.) The real lesson is that they are not as smart as they think they are. (or as I am)

Leaving aside the question of whether you’d have to have a brain made of cottage cheese to now put money into a market that can lose a trillion dollars over a glitch— and then shrug off whatever caused the glitch in the first place— we have to ask ourselves if whether the flash crash was what I am pleased to call The Hardwired Scenario.

Which is to say that (as in the novel) the crash wasn’t an accident at all.

The market wasn’t burned all the way to the ground, so if the Flash Crash was deliberate, that means it was a proof of concept. It was someone proving to themselves, to a client, or to the United States that they had the means to cost our economy trillions of dollars and wipe out the investments of everyone in the U.S., and then some.

Who would do such a thing? The Chinese hackers who created Ghost Net and Shadow Network would do it just for fun. Russian hackers are all over the place, and often coordinate with their security services. Cybercriminals bored with their 419 scams might have decided to make some money shorting S&Ps. Or someone in a big Wall Street bank might have decided to show the government who’s really running the country, and what the dangers of pursuing actual regulation might be.

Your guess is as good as mine. And your paranoia might well be better.

john_appel May 14, 2010 at 3:13 pm

I really, really, really want to be able to apply Steve Jackson's Law – "Never assume malice when incompetence is a sufficient explanation" – to this one. But as a paid paranoid I've been wondering much the same thing for a week. Bad on me for not remembering the Hardwired reference.

It did give me another opportunity to talk up to a less-erudite colleague John Brunner's Shockwave Rider, which looks more and more prescient by the day.

Ralf the Dog May 15, 2010 at 12:49 am

[comment deleted because it is a spoiler to one of Mr. Willams recent books. If you have read the book you can guess what my comment was and laugh.]

I love implied jokes. The ones that others make up for me are generaly better than the ones I make up myself.

David J. Williams May 15, 2010 at 1:16 am

check out this awesome/scary audio from the Wall Street pit; as it happened

Ken Houghton May 15, 2010 at 2:26 am
kat May 15, 2010 at 1:07 pm

Huh. I am suddenly feeling better about sinking my life savings into a house. It's more comfy than keeping it under the mattress, and looks like those are my two safest choices these days…

dubjay May 15, 2010 at 8:21 pm

Kat, of course the value of your house also dropped by around 25% in the recent fiasco, so you pays your money and takes your chances.

Ken, I always thought Charlie Stross had great taste in his reading!

halojones-fan May 17, 2010 at 6:43 am

This isn't the first time something like this has happened. Remember the United Airlines thing from a couple of years ago? 75% down in about ten minutes due to a mis-dated story from 2002.

HAL May 17, 2010 at 11:57 am

No it is you human's that are stupid. Your fractional reserve system is actually a kind of Ponzi scheme that pushes savers into longer term positions than the terms they have agree to. This increases the money supply via leverage and creates an inherently unstable system.

We computers are only trying to predict the point at which you stupid humans will wise up, which occurs sporadically in cycles.

HAL May 17, 2010 at 12:01 pm

… and don't bother telling me about my apostrophe error. That's part of my Turing test module. It makes me seem more human, and therefore more stupid. I know perfectly well where to put apostrophes.

GOP_Tiger May 17, 2010 at 12:04 pm

Something very similar happens in Tom Clancy's novel Debt of Honor, where a virus inserted in the computer code at the NYSE causes a massive selloff.

Eric May 17, 2010 at 12:22 pm

I don't buy the deliberate crash scenario, because nobody could have thought the scenario through.

Although, as John notes above, invoking Jackson's law could, I suppose, mean that there is an incompetent malicious actor out there.

Yeah, that's a pleasant thought. Thanks. Hope my vegetables do well this year.

Anonymous May 17, 2010 at 12:27 pm

Similar to what HAL says, maybe a baby AI decided to take notice of our little stock market. It assessed the long-term value of the stock and adjusted the prices accordingly.

Anonymous May 17, 2010 at 1:30 pm

Of course it was deliberate. It was a warning to the Senate banking committee to get that "bank reform bill" done the way Wall St. wants it or ELSE!!!

M. Report May 17, 2010 at 2:05 pm

R. A. Lafferty is the go-to guy:

'Slow Tuesday Night' is the same
Stock Market road race, plus seat
belts and air bags.

If the Market fails to self-regulate
in some such way, we will get the
cruelly efficient future regulated by
'Mr. Hamadryad'

Steve May 17, 2010 at 6:09 pm

Doesn't it look a bit familiar?

Kind of like 2 weeks before the election of the One?

john_appel May 17, 2010 at 6:55 pm

Steve: I believe there's arguably a significant difference between a) imminent implosion of the financial system due to under-capitalization, hyper-leveraged institutions blindly following risk models showing a future of infinite appreciation, accumulation of toxic assets in the trillions, and the slamming shut of global credit markets following the failure of Lehman, and b) a mysterious one-day, short-term plunge with no proximate cause.

Nobody's arguing the proximate cause of what happened in the fall of 2008. Really sharp people are looking at the incident from a couple weeks ago and are still in "WTF?" mode.

luagha May 17, 2010 at 7:33 pm

Keep in mind that the US market has the legal recourse to invalidate all trades in such circumstances – 'rolling them back' to a point in time before whatever triggered incident hits. Supposedly they were very close to doing so this time.

It's a big mess to do, of course, and it makes those people who has long-standing short positions very very mad because it's exactly what they were predicting and here it is, their massive profit… but they have the legal ability to do so.

john_appel May 17, 2010 at 8:06 pm

That's just what happened to a number of the bogus trades last week.

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