Civil Discourse Now

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World of algorythmic trades: simultaneous creation of a market "crash" by the same player that sells "short."

   A "short" sale occurs when someone bets a specific stock or generally the market will drop in value. Perhaps the most famous practitioner of the short sale was Jesse Livermore. When the market crashed in 1929, he had sold short. He made millions, while other, less-inspired traders, leapt to their deaths from office windows overlooking Wall Street.

   At the end of the afternoon, when various news programs report the day's trading, rare is a camera shot of the trading floors. In "Trading Places," Winthorpe (Dan Aykroyd) and Valentine (Eddie Murphy) pull off their big coup on a commodities market floor in New York. (Their train had traveled from Philadelphia to NYC.) The trading floor was packed with traders in the various pits, all in color-coded jackets that corresponded with the company for which they placed "puts" and "calls." Randolph and Mortimer Duke (Ralph Bellamy and Don Ameche) thought they had inside information about orange juice futures. Of course, the info was incorrect. They lost while the heroes made money.

   Winthorpe and Valentine sold short. They began to sell at 142 per share contracts on orange juice futures---contracts they did not yet own---then, later, as the p[rice dropped, began to sell.

   This is all very nice. What does it have to do with today?

   Some sixty percent (60%) of the trades on the New York and London markets are algorithmic. Those trades are based on what the computers say to do.  When someone proposed a rule that would require at least one second to pass before a sale could be made, that proposal was nixed.

   Here is the potential catastrophic problem. If a corporation or---more likely---a nation state possessed sufficient capital and had the computer people necessary to handle the work, the numbers upon which the computers that figure trades could be fed numbers radically skewed one direction. At the right moment, with the right actions---like engage in a massive sell-off of stocks---a "crash" could be orchestrated. If, at the same time, the same entity sold short, the World's capital could be wiped off the table and brushed into the pockets of the entity in question. 

   After the 1929 Crash, various controls were put into place on the stock market. Ronald Reagan---an economics major from Dixon College in Illinois---did not like regulations. Regulations inhibit growth, was the idea. In this hypothetical I pose, the entity would use a couple of cut-outs to "lose" money and go insolvent. The entity itself would sell short. With markets all over the World, an investigation would take a considerable time, during which the entity would claim its money and tell the rest of the World to screw itself.

   Perhaps we should return to the old days, when stocks were bought and sold under the trees on Wall Street.

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Comment by Paul K. Ogden on March 20, 2013 at 8:28am

Mark Small, the Luddite.   He's been opposed to all new developments since electricity.


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