One of the earliest, and certainly one of the most famous, computers of all time is HAL 9000, the sentient computer that controls the systems of the Discovery One spacecraft and interacts with the ship’s astronauts in the 1968 science fiction film classic, 2001: A Space Odyssey. HAL is an acronym for “Heuristically programmed ALgorithmic computer.” A “heuristic” is a technique or a mental shortcut that enables people to solve problems and make judgments quickly and efficiently. Heuristics employ rule-of-thumb strategies for finding approximate solutions when seeking an exact solution may be time or cost prohibitive.
On Wednesday, May 20, 2015, The Wall Street Journal ran an article headlined “Regulators See Risks in the Rise of Machines.” The article states: “The rise of computerized trading and the changing roles of big banks are reshaping financial markets and potentially raising new vulnerabilities” according to US regulators. Federal Reserve Chairman Janet Yellen said that the ability of investors to buy and sell securities quickly “could deteriorate in today’s markets, given changes like the rise of electronic trading and new regulations that affect banks’ willingness to buy and sell securities.” The Financial Stability Oversight Council, according to the article, “cited the rise of rapid-fire electronic trading as a potentially destabilizing factor” by tying “disparate parts of financial markets more closely to one another.”
Back at the turn of this century, fears about the so-called Y2K bug proved to be unfounded, but today market participants and regulators are worrying about newer tech glitches, such as those connected with the May 2010 “flash crash.” Interestingly, only a day before its “rise of machines” article, The Wall Street Journal published another article about a relatively obscure technological problem known as the leap second—a one-second adjustment that is occasionally applied to Coordinated Universal Time to synchronize the slight discrepancy between time clocks and the Earth’s rotation. The coming leap second adjustment, to be added on June 30 immediately before 8 pm EDT, is the first to take place during active trading markets (for certain markets around the world) since 1997, when algorithms weren’t nearly as pervasive as they are today.
HAL 9000 proclaimed in the film that “he” was “foolproof and incapable of error.” According to The Wall Street Journalarticle, the Intercontinental Exchange Inc. said it was “confident” that the leap second will not cause any issues on its systems, but could not “guarantee” the same for all systems used by market participants, data vendors, and other third parties. In Space Odyssey, the fictional Mission Control staff warns the astronauts that HAL is starting to malfunction. HAL insists that any problem is due to human error. Believing they are conferring in secret, the astronauts agree to disconnect HAL but the computer lip-reads their conversation and, for “his” own survival, fights back.
Certainly, no one would suggest that all electronic, computerized and algorithmic trading be banned and that we return to the days of open-outcry. At the same time, it is clear that our ability to identify the risks arising from the machines we have created has outpaced our ability to formulate a solution or even a way to substantially mitigate such risks. Regulators such as those comprising the FSOC will need to devote substantial resources to monitor technological advances. The challenge will be to adopt regulations that curtail the potential for systemic risk, without imposing market-stifling requirements—certainly no easy task. Otherwise, we all could end up singing “Daisy.”