Two days ago, the Dow Jones Industrialized Average plunged almost 1000 points in a half hour . That's almost 10 percent of the entire value of the market in 30 minutes. That's insane! What happened? Well, it turns out, it was a fairly simple technological trigger that caused the problem. Seems a trader entered a buy order for $16 billion when he meant to enter $16 million, and the race was on. In the words of the late, great Emily Latella on Saturday Night Live, "That's very different."
Panic on the Street
The mistaken trade caused a panic as automatic trading mechanisms kicked in causing massive sell orders and the precipitous drop. At no point, did it reach the magic 10 percent threshold that will pull the plug on trading for 30 minutes. Instead, there were 30 minutes of madness until people began to figure out something was wrong and the market was able to get back a significant chunk of the value before trading closed on Thursday.
Politicizing the Situation
Politicians seized on the situation to call for smarter regulation of the system.
"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."
Simple Ideas for Complex Problems
It my very well be so, that the government has to step in and save Wall Street from itself, but I was discussing the matter with my friend Jason Turcotte the other day and we came up with a fairly simply solution to prevent issues of this sort from happening in the future. This solution doesn't require in-depth investigation or even a regulatory overhaul. What it requires is simple programming.
The idea Jason came up with off the top of his head during our discussion was this: How about a dialog box asking if you are really sure you want to do this when a trade seems unusually large? Who knows? Maybe $16 billion isn't unusual for institutional investors (although I would like to think it is), but if it is and a simple dialog box could solve the problem, it's worth a shot.
I think we could even take it a step further and let the trader know:
Warning: This trade could trigger the automatic sell off systems. Are you sure you wish to continue?
Maybe Jason and I are naive about the inner workings of high finance, but maybe we stumbled onto the easiest solution of all, a couple of dialog boxes and prompts, which perhaps could prevent the next Wall Street disaster from ever happening. Stranger things have happened, that's for sure.
Photo by artemuestra on Flickr. Used under Creative Commons License.