Posted: July 10, 2014
The futurist: Countdown to the crash
The power of Artificial Intelligence to destroy the stock marketThomas Frey
A few weeks ago, Stephen Hawking opened the world’s eyes to the dangers of Artificial Intelligence (AI), warning that it has the potential of outsmarting humans in the financial markets. But few people realize that we are already in imminent danger of this happening.
The stock market is a system for assigning value to companies through the buying and selling of stock. It’s a human-based system, assigning human value to corporations owned and operated by humans. At least that was how it was supposed to work – until the machines started taking over.
In the 1960s, an average share of stock was held four years. By 2000, average ownership dropped to eight months, and in 2008 it dropped even further to two months.
Today, the average share is held a scant 20 seconds and within a few months, it will drop to less than 10 seconds.
At the center of this rapid buying and selling of stock are a series of high-frequency trading machines run by the quants, the math-whiz kids who are a type of hackers only on Wall Street.
Without having people at the center of these trades, we have lost the core ingredient, our ability to accurately assess value.
The invasion of high-frequency trading machines is now forcing capitalism far away from anything either Adam Smith or the founders of the NYSE could possibly find virtuous.
We’re not about to let robots compete in the Olympics, driverless cars race in the Indianapolis 500, or automated machines play sports like football, basketball or baseball. So why is it we allow them to play a role in the most valuable contest of all, the world wide stock exchange?
With crude forms of AI now entering the quant manipulator’s toolbox, we are now teetering dangerously close to a total collapse of the stock market, one that will leave many corporations and individuals financially destitute.
Here is why this should be ringing alarm bells all over the world.
The Flash Crash of 2010
Few things explain the dangers of AI manipulations of the stock market quite like the Flash Crash of 2010. Here’s a quick overview:
The date was May 6, 2010 and by all outward appearances, everything on the markets appeared to be normal. Yes, people in Greece were protesting austerity, but there were no other indicators of what was about to happen.
Cheap credit had been pushing stocks higher for months, but the mood was changing. Every time disgruntled workers in Athens hits the TV screen, the Dow Jones would drop a bit more. By 2:30 p.m., it was down 2.5 percent, a moderately bad day. That’s when everything was about to go crazy.
It began as a ripple in the price of E-mini futures contracts, traded on the Chicago Mercantile Exchange, but almost nobody noticed. This tiny ripple quickly morphed in a major ripple, and with very little forewarning, the tail quickly started wagging the dog to pieces.
Within seconds, the Dow has lost 100 points, then 200, 300, 400 and 500.
It’s important to know that the internal self-limiting mechanisms designed to halt trading after unnatural price swings only works until 2:30 p.m. EST.
At 600 points down, the Dow had fallen further than it did on news of Lehman Brothers’ collapse in 2008. But that crash took a full day, this was killing the market in a matter of seconds.
Thomas Frey is the executive director and senior futurist at the DaVinci Institute and currently Google’s top-rated futurist speaker. At the Institute, he has developed original research studies, enabling him to speak on unusual topics, translating trends into unique opportunities. Tom continually pushes the envelope of understanding, creating fascinating images of the world to come. His talks on futurist topics have captivated people ranging from high level of government officials to executives in Fortune 500 companies including NASA, IBM, AT&T, Hewlett-Packard, Unilever, GE, Blackmont Capital, Lucent Technologies, First Data, Boeing, Ford Motor Company, Qwest, Allied Signal, Hunter Douglas, Direct TV, Capital One, National Association of Federal Credit Unions, STAMATS, Bell Canada, American Chemical Society, Times of India, Leaders in Dubai, and many more. Before launching the DaVinci Institute, Tom spent 15 years at IBM as an engineer and designer where he received over 270 awards, more than any other IBM engineer.