"Preventing the Next Flash Crash"

In this editorial (New York Times, May 6, 2011), Edward E. Kaufman Jr., a former U.S. Senator (D-Delaware) and current Senator and chairman of the Permanent Subcommittee on Investigations Carl M. Levin (D-Michigan) decry the lack of regulatory reform on high-speed automated trading. They recall the 2010 flash crash:

One year ago, the stock market took a brief and terrifying nose-dive. Almost a trillion dollars in wealth momentarily vanished. Shares in blue-chip companies were traded at absurdly low prices. High-frequency traders, who use computers to look for microscopic price differences in stocks on different exchanges and other trading venues, stopped trading, while others immediately sold whatever they bought, mainly to each other, in what has been called “hot potato” trading.

Their tale of inaction and obstacles to action is depressing, and all too familiar. Here's an example of a practice with a demonstrated capacity to do tremendous harm to the world economy, balanced only by dubious claims of benefits and the religion of profit. The federal government clearly has the power and authority to remove the enormous risk but can't - or won't - take action.

It doesn't bode well for our cultural ability to deal with far less dramatic and harmful, but still serious, ethical issues raised by other pervasive and autonomous information technologies whose risk has not yet been demonstrated (shall we always wait for disaster, or could we once in a  while prevent it?) and for which no single entity with the capacity to control them can be found.

For more on the flash crash, see my earlier post.

Ken Pimple, PAIT Project Director