Is Technology Destroying the Markets?
In the late 1960s, I worked at Grumman Aerospace and during the evenings took courses at the Farmingdale location of Brooklyn Poly. In 1970, I earned my Master of Science, Operations Research degree.
The basic computer used back then was the "refrigerator on its side"-sized IBM 1030. The mainframe used at both Grumman and Brooklyn Poly was the IBM 360. The inputs to both were 80-column punched cards.
In my course studies, I learned several simulation languages, including Dynamo developed by MIT professor Dr. Jay Forrester. I read all of his books because I was intrigued by the predictability of simulation modeling.
In addition, I taught myself how to write code in the engineering programming language Fortran. My conclusion way back then was that computers and simulation modeling were great inputs to making decisions, but can't design models to make the decisions for you. The idea that creating a derivative can assume all possible inputs and outcomes is pure bunk. It can't be done. We have yet to learn this after repeating the same type of mistakes time after time on Wall Street and in the capital markets.
Every time a black box trading system implodes, as did the Knight Capital Group(KCG) system last Wednesday, Aug. 1, I re-iterate my opinion that high-frequency trading should be banned.
Obviously, I don't mind using computers and technology to facility trading, but how many times must we say, "How can we make sure that this does not happen again?"
The truth is, we can't be sure it won't happen again. By nature, the trading environment will always find a bug in the software. The only way to prevent spiraling-out-of-control losses from high-frequency trading is to dismantle such trading systems.
As I understand it, Knight Capital Group lost $440 million in just 20 minutes by starting a trading program that was supposed to execute a strategy in 20 days. This market does not need this continued overhang risk. Wasn't the Flash Crash of May 2010 scary enough?