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The more I think of the "flash crash" the more it brings to mind this quote from Vernor Vinge.
Within thirty years, we will have the technological means to create superhuman intelligence. Shortly after, the human era will be ended. ”
— "The Coming Technological Singularity" by Vernor Vinge, 1993
What he was describing here was "the singularity", the point where machine or computer thought will surpass human thought. He based it on Moore's Law extrapolating it to suggest that in thirty years time the processing power of a microchip might be equal to or exceed that of the human brain. Technical singularity is akin to Vinges' prophecy but based on the advance of technology, to the point where better technology can create even better technology a recursive scenario. Yes... exactly like the movie iRobot.
Technological singularity refers to a prediction in Futurology that technological progress will become extremely fast, and consequently will make the future (after the technological singularity) unpredictable and qualitatively different from today. It is most often associated with the ideas of futurist Ray Kurzweil.[citation needed]http://en.wikipedia.org/wiki/Technological_singularityIt was fascinating to witness that the "Flash Crash" has brought to the forefront the argument of man vs. machine. What kind of hit home was watching the CNBC coverage after the close of business on March 6th, 2010 and rare interview with Mark Fisher, a trader of legend on the Chicago Mercantile Exchange, a super PIT Trader, a veritable John Henry character. Here he is warning of the dangers of relying on machines for trading. Lamenting the speed with which machines can trade at and the and the dire circumstances it will wreak on the markets, without the ability for humans to step in.
We are clearly at a crossroads of sorts the fundamental question being does having a human element interpersed with machines make it more dangerous or does having a fully electronic marketplace make it less. Clearly a hybid of an electronic/analog market is problematic. Although to Mark's suggestion, it isn't so farfetched that there is one glaring weakness of machine value, and that is of relative value. The idea that a machine would sell a Procter & Gamble at $39 a share without being able to recognize that this price was clearly incorrect or that the value of the company fundamentally wouldn't support this price is something that needs to change or does it? I was thinking of amost recent example with Intermune which in two days went from $17 to $48 in two gap ups and then went from $43 to $9 in one gap down, it didn't seem to be a problem with machines recognizing value there, granting of course that trading was either halted or the runup's took place pre-market. Dendreon is another one that also comes to mind when you discuss breaknecking stock up and downs in "Flashes".
Here I thought Felix Salmon's article on Alpha Hedge, put it into perspective, that basically there was no difference from the Day of May 6th to this past May 19th Thursday when we went briefly past the falsh crash low twice I believe Intraday.
http://seekingalpha.com/article/206223-the-weirdly-rational-flash-crash
What his simple but insightful research suggests is that the flash crash although very fast was rooted in fundamentals. That there was a bonafide and legitimate rush for the exits.
Personally I am of the opinion that the "flash crash" was caused by human hands and quite possibly deliberately, not criminally, but deliberately executed. Why, to basically enable an orderly exit by big institutions out of huge positions, and likely save the US markets and potentially economy from a likley catastrophic event. This is clearly selling that could have fed on itself and burned itself to the ground, in clearly what can be described as a race to the bottom. The movie that best describes this is in Days of Thunder when Cole Trickle, intentionally redlines and blows his engine so that he doesn't have to face the fact that he has lost his nerve.
This is a prime example of the problem that we have created in the wildfire prone west, where in our effort to create awareness and erradicate wildfires we have created a 30-50 year fireless environment and our complacency and falsh sense of security has enabled us to build homes they shouldn't be and when a fire does occur they are devastatingly fast and all consuming and deadly. The stop orders accumulating underneath were exactly that with everyone's stops extremely tight expecting a downtrend. This was a controlled conflageration, if the NYSE market makers hadn't slowed down there systems deliberately the fire would have burned uncontrollably and wantonly.
What was so amazing about the "Flash Crash" -- watching it unfold -- was the rumor of a fat finger trade was rampant no more than 30 seconds after it started/ended and that it was immediately picked up by all the news outlets particularly by CNBC, which really should have had the story staight from the get go becuase they have reporters on the floor of the exchange, and apprently were not aware that the market makers themselves redlined the engine so that it blew. This action immediately, caused the stop loss orders to be blown out and the standing buy orders sittng at 10-20% discounts of the current prices to trigger creating a massive swell of buying momentum that they could easily sell into without driving down the prices too quickly. This worked brilliantly as the fat finger trade or pointing to the machines made it seem like an anomaly, and created seemingly good bargains to get into really quickly.
The selling didn't stop and kept selling into this artificially created demand, however the number of Buyers dissipated and now as no real explanation has been presented and that it appears that the selling was real and highly motivated people are starting to sell once again as a result we ran back down to the Flash Crash Low. It is likely that the selling isn't over as we see the folks who bought into that early swell realize they just got their lunch eaten once again. The will likely get out this week if the market still struggles and bring us down to the next level of down.
We are just three years removed from Vernor Vinges prophecy and it isn't so farfetched that trader's will likely be replaced by machines and that the true ideal of a fast and equal market will result. Already processing news signals on stocks and acting on signals and world statistics quicker than a human can. The one thing that we need to be aware and scared of is human intervention or gaming. This will maintain the status quo,
