Algorithms controlling our world

Algorithms controlling our world

On May 6 2010 an event occurred where 9% of the US stock market simply vanished. Until today nobody knows why and how this happened. In financial markets, algorithm trading (aka called algo trading) is becoming more and more popular. So called financial engineers are creating codes which they enter in computers to trade stocks for us. It accounts for over 70% of the entire market.. all controlled by a bunch of algorithms on computers.

Nowadays the derivate market alone has a nominal face value of more than $791 trillion. Just calculate the amount which vaporized on 6th may 2010; trillions of dollars just disappeared. Large banks, insurance and pension funds are having difficulties in getting a profitable return; if they do bad; mortgages, pensions and other financial products will decrease in value and you and me will get less pension in the future. Is IT trading becoming too automated and too dominant in financial markets? Should algo tradnig be banned and should traders be shouting to buy stocks at the AEX again? For the latter, probably not.. but who tells that such an event won’t happen in the future on a larger scale? It is however very interesting to observe the development how we are losing control over little things, while IT is controlling more and more in our daily lives. Too which extend is this a good development?

Here is an interesting video on a Ted conference by Kevin Slavin where he expresses his view about these changes:

http://www.ted.com/talks/kevin_slavin_how_algorithms_shape_our_world.html