Billions Lost: Blame Technology for May 6 Stock Plunge?


Maybe it wasn't Greece after all.

Thursday's massive stock plunge was originally blamed on the fragile Greek economy -- but a Chicago-based computer glitch may be the true culprit. Because machines now perform the task of transferring stocks -- instead of floor traders matching buyers and sellers -- the rate of exchange has increased the flow of buy and sell orders.

While speed and efficiency produces more commerce and activity, it may not always be such a good thing.

As the New York Times reports, it "also sometimes facilitates the kind of unexplained volatility that roiled markets Thursday."

Simply put, there's less time for human oversight and monitoring -- if something bad happens.

“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at the McDonough School of Business at Georgetown University.

The Times continues: "In recent years, what is known as high-frequency trading — rapid automated buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange. In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges.

"One official said they identified 'a huge, anomalous, unexplained surge in selling, it looks like in Chicago,' about 2:45 p.m. The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control."

Considering the technology is here to stay, the big question that lingers: Can such a massive plunge be prevented in the future?

While there are Stock Enchange safe guards in place that shut down trading if large drops occur, those measures rely on human observation. It would seem that we have to rely on technology even more -- so those observations can be made within milliseconds, not minutes.

Can the SEC and Wall Street implement an even faster safe-guard mechanism to pounce on such glitches?


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