Have computers caused financial meltdown?

by Dean on October 15, 2008

financial crisis Have computers caused financial meltdown?

Here’s a scary question: is the world’s financial stability inextricably tied to computerised trading algorithms?

Automated or algorithmic trading has been pegged as one of the causes of the stock market crash in 1987. Software was developed in the 1980s to trigger trades once a certain threshold was reached – either to maximise profit or to protect against losses.

Such programs are far from perfect. Earlier this year, the value of United Airlines stock dropped after an algorithm triggered sell orders based on an old Google News story.

$1 billion was wiped off the UA share price in 12 seconds.

How the web destroys banks

The current financial crisis has also highlighted an interesting phenomenon – the speed and accessibility of electronic/Internet banking can lead to invisible or ’silent runs’ on banks.

In the famous Wall Street stock market crash of 1929, the problems were exacerbated by public panic and mass withdrawals of money from beleaguered banks.

Until Northern Rock, there hadn’t been a run on a British bank for 140 years. Fuelled by liquidity fears, worried Northern Rock savers rushed to withdraw their money. A similar run afflicted big banks such as Fortis, Kaupthing and Wachovia.

But there weren’t any tell-tale queues on the streets. It all happened silently, quickly and electronically.

[The full text of this news article appeared in PC Plus magazine, issue 276]

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