I’m not sure which I’m less comfortable with at this point: the notion that a single human trader somewhere mis-typed an order entry on a keyboard, thus causing computerized trading systems to go wiggy and yank the floor out from underneath the stock market, or the notion that computerized trading systems, acting on their own and directly counter to the old-fashioned NYSE, went wiggy and yanked the floor out from underneath the stock market.

The investigation into what exactly happened last Thursday that caused the Dow Jones Industrial Average to briefly shed 998 points before regaining two-thirds of that continues. The latest theory is that the circuit breakers at the NYSE worked as intended … on the NYSE, but that trading then switched from there to electronic networks, where computers sought buyers in vain, thus driving prices down.

All of this happened over about 20 minutes. As interesting to me as finding the cause of the plunge is having someone explain to me what suddenly arrested it.

I recently started reading Saul Alinsky’s “Rules for Radicals.” Early in the book, Alinsky makes the point that agents of change—that would be “radicals”—need to stop seeing the world the way they want it to be and start seeing it for what it is. Taken out of context, it’s good advice, but tough to follow for me at times.

In my mind, I have this old-fashioned notion of stock exchanges as places where companies access capital provided by investors who believe in the companies in which they are investing. That’s the world as I would like it to be. The world as it is is an LTCM-on-steroids place where computer-driven programs act on their own based on algorithms written to vacuum up fractions of pennies, not even the nickels Roger Lowenstein describes in “When Genius Failed.”

This entry was posted on Monday, May 10th, 2010 at 3:59 pm and is filed under Monday's Random Shots. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.