The Dow Jones Industrial Average has taken almost everyone on a long roller coaster ride for the last couple of weeks. Price swings in the 400-dollar range have not been uncommon, and the only people who seem happy are makers and sellers of head ache remedies. I’ve always wondered what really drives the stock market, and now it turns out that social media and computers may be partially to blame. In fact, flesh-and-blood traders are more and more being replaced by wire-and-plastic robots.
For years we’ve known that various software packages and algorithms are used to make trades. Using complex formulas that measure almost every aspect of the market, world events and even the weather, thousands of trades can be executed in a matter of minutes. Even more intriguing is that the separate computers end up responding to each other so there is a kind of endless loop, with little human oversight. This is not to say people aren’t involved in the process, and that’s where social media, and even more problems come in.
Before the invention of the telegraph, there were all sorts of mechanical devices used to send messages long distances. But it sometimes took hours for a message to go a few hundred miles. Now, although e-mail and Twitter can send financial data around the world in a matter of minutes, that doesn’t mean the message is accurate. So what is happening now is that traders are getting, and spreading, all sorts of rumors and speculation around the world at the speed of light. And in too many cases responding to inaccurate, if not outright fraudulent information. And because in this high-speed world a few seconds can mean millions of dollars, too little time is spent checking facts and verifying rumors.
Now, it’s also true that there are safety systems built into the markets that can, in some cases, completely stop trading if certain financial criteria are met. But one has to wonder what happens if one computer system is saying “stop,” and another computer is saying “buy and sell”? As we’ve often asked, “Who guards the guardians?” Technology has certainly made it easier for almost anyone to enter the market, but there is still something to be said for having a steady human hand on the economic tiller.