Sunday, May 9, 2010

The day the computers panicked PART 1 (cont’d)

How to drive a computer mad

Although computers are emotionless, calculating machines, their behavior seems emotional at times. In that context and with tongue in cheek let me say: “Nothing irritates a computer more than violating its assumptions.” Thursday something did just that. We have as candidates “fat fingers,” Greeks, and no doubt other candidates will surface as people look into it. The exact cause of the panic isn’t really that important. But, since we have set up hearings to “investigate,” it’s probably worth pointing out a few other candidates for blame.

A posting on this blog entitled “Sometimes Wall Street provides more entertainment than Hollywood: PART 2 the losers” pointed out a few mistakes people make. These mistakes can be programmed into computers as assumptions or can be preconditions for the program to operate as intended. In fact, one of them has been advanced as a candidate.

Many programs assume instantaneous, continuous liquidity. The posting stated: “Investors get it so, so wrong. To illustrate, everyone reading this posting probably either has experienced or will experience times when most of their assets are illiquid. We aren’t just talking overnight or the mutual fund industry’s practice of redeeming at closing net asset values. Exchanges get closed down, markets dry up, and these things happen fast.” Well, an interruption to trading on selected NYSE listed stocks, Procter & Gamble in particular, has been brought up as a potential trigger for some of the volitility. Computers just don’t like the world not conforming to their assumptions.

Alternatively, the same posting stated: “Consider big, instantaneous changes in price (“discontinuities” or “gapping” in investor jargon). If one has investments, there is a good chance at least one asset experienced a gap in price during the time it takes to read this posting. It might be small, but it isn’t unusual.” Gapping due to lack of liquidity or “fat fingers” could have been a contributing factor.

However, the reason these weren’t initially mentioned was to keep the focus on the important issue. It would be a shame if the “investigation” obscures the obvious and most important point.

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