“[John, holding a gun to his head]

Terminator: You cannot self-terminate.

John Connor: No, you can’t. I can do anything I want. I’m a human being, not some  . . . damn robot.

Terminator: [correcting him] Cybernetic organism.

John Connor: Whatever! . . . .

Terminator: Based on your pupil dilation, skin temperature, and motor functions, I calculate an 83% probability that you will not pull the trigger.”

Terminator 3: Rise of the Machines”

If it weren’t so serious, it would really be pretty funny.  Just imagine – computers controlling Wall Street trading go berserk – film at 11!  Well, that’s pretty much what recently happened.

Within the last few years, some strange things have been happening on Wall Street.  It seems that the computers which engineer trades faster than humans can follow, recently went stone cold bonkers again – the digital version.  Instead of discharging their programmed duties, the trading computers on the morning of Wednesday, August 1, suddenly flooded the market with millions of trades . . .

The story has been unraveling ever since.

A maverick algorithm, those mathematical Zen koans, which guide so much of our computer technology well beyond the barriers of normal human understanding, repeatedly bought and sold millions of shares.  Companies like Radio Shack, American Airlines, Best Buy and Bank of America, all saw their trading volumes explode beyond all comprehension.  Human comprehension, that is.  Advanced technology strikes again.

The trading algorithms are designed to make money on tiny fractional moves of a stock, focusing smaller, and moving faster, than any human can imagine.

We live in a 21stC world, where few of us understand anymore how any of our machines work, or how to fix them when they break.  Even the supposed experts often just throw the machine in the garbage and substitute it with a new one, freshly burst free from its shrink wrapping.  The product cycles of our electronic machines are now so short that one cannot become attached to any generation because there is always a generation coming right behind which will be promised to be better and more advanced.  Who wants to be left behind?  Not us.

Computers came to Wall Street long ago already.   With them came the ‘Quants,’ former math and physics grad students, who tired of academia, and wanted to drive Ferrari’s and Maserati’s just like some of their far less intellectually accomplished classmates were doing, who were working on Wall Street during the gravy years.  Presto, high finance meets modern computing power.

Periodically, regulators and the public have questioned the fairness of having computers, programmed to trade stocks, bonds, derivatives and all manner of financial paper, trading in competition with humans.  The average Day Trader sitting at his or her computer from early morning on, cannot read and absorb enough information to be able to act as fast as a computer programmed to execute lightning fast trades – it simply cannot be done.

What we now call the “Flash Crash” of 2010 (a/k/a “The Crash of 2:45”) happened on May 6, 2010.  On that Thursday, all of a sudden, the Dow Jones Index crashed some 1,000 points (9% of it’s then value), only to recover minutes later, to the astonishment of human traders standing around, who could only scratch their heads in amazement.  This was the second largest intra-day point swing, a 1,010.14 point plunge, and the biggest one-day point decline, 998.5 points, in the Dow Jones’ long and storied history.  Trillions of dollars were lost.  The SEC (and the CFTC, overseeing commodities trading) studied the problem, and jointly wrote a big report – Congress held hearings.  The cause?  Still a subject for robust debate, several theories, and much speculation, I am afraid.

The recent Wild Wednesday berserk computer trades went beyond anything seen in the 2010 Flash Crash.  “The machines have taken over, right?” speculated Patrick Healy, the CEO of Issuer Advisory Group, a consulting firm.

The crazy, out of control trading seemed to center around one New Jersey stockbroker, who specializes in computer trading.

Computer stock trading based on algorithms now comprises some 50% of all trading, and, as regulators made way for this technology, it has now become clear that stability is at risk.  The 2010 Flash Crash suggested that there was trouble – Wild Wednesday’s berserk computer trades tell us; yes, there is absolutely trouble.

A number of experienced voices on Wall Street have expressed an unnerving thought – that a computer trading monster has been created, which cannot always be controlled.  This monster could well scare off individual investors, clearing the way for even more computer-driven trading.  We are not talking about Isaac Asimov’s robot sci-fi stories here; we are talking about the highest levels of finance imaginable – computers which hold our economy in their silicon fingers.

In case you have forgotten about the serious threats of cyber-warfare against a civilization which became utterly and completely dependent on computers within practically a single generation, you can bet that some hacker in North Korea, or Lord knows where else, has not forgotten.  ‘Pull the thread, and watch the whole sweater unravel.’  That’s the risk.