Saturday, May 29, 2010

Are Goldman Sachs and the Megabanks Able to Wipe out an Entire Economy with a Keystroke?

Scott Thill
AlterNet -

How artificial intelligence and robotrading pose a growing threat to the global marketplace

"We have found no evidence that these events were triggered by 'fat finger' errors, computer hacking, or terrorist activity, although we cannot completely rule out these possibilities," a recent Securities Exchange Commission (SEC) report on the so-called May 6 "Flash Crash" that wiped out a cool trillion in a mere half-hour weakly admitted. "Much work is needed to determine all of the causes of the market disruption."

That's another way of saying that it remains only the market makers that caused the largest single-day point decline in Dow Jones history who actually know where the bodies are buried. The rest of us, including the SEC, have a Sisyphean task of sifting through mountains of dense data. But regardless of who ends up on the end of possible criminal proceedings, the SEC is sure that the whole clusterstock was seriously exacerbated by the robotraders executing light-speed electronic transactions via supercomputers, while exposing our hyperreal economy as an Internetworked casino. If anything, the Flash Crash proved that market makers like Goldman Sachs and plenty more playing both sides of securities could be capable -- with the high-priced help of math and computer science Ph.Ds crafting up proprietary, recursive algorithms -- of wiping out any corporation's stock, perhaps any nation's economy, in a comparative instant with just the press of a button.

"It was actually amazing watching it all happen," Gina Sanchez, Director of Equity and Asset Allocation Strategy for Roubini Global Economics, told AlterNet by phone. "We went from risk-aversion to risk-seeking in the matter of an hour. But it doesn't bother me so much that the algorithms went after the bids. They were doing what they're supposed to do, which is seek out arbitrage opportunities. What concerned me was how the bids got out there in the first place."

Read all of it.