Retrieved by Pat Darnell for Ed Purposes | [SOURCE]
" ... An algorithm," [Felix Salmon] explains, "can analyze data much faster than the human mind ever could — and can therefore respond instantly to market conditions. ... "
Today on Fresh Air Interviews, we hear an explanation of what happened on May 6, 2010, when the Dow Jones "flash crashed."
" ... In 14 seconds, the futures contracts changed hands over 27,000 times. After an automatic stabilizer paused trading for five seconds on the futures exchange, the market steadied and then recovered. ... " (Salmon, Felix. Jan 13, 2011 HERE)
" ... But even after the SEC/CFTC report was issued in September, "no one really knows why that [crash] happened," says financial reporter Felix Salmon."What we do know is that there were some crazy trades which happened in those 5 minutes. We had stocks trading for a penny a share or $100 a share, and no human would do that." (ibid.; Salmon)... "
It turns out, " ... Last spring, Dow Jones [had] launched a new service called Lexicon At the most basic level, computers help prospective buyers and sellers of stocks find one another—without the bother of screaming middlemen or their commissions. ... "
" ... [S]ays Harold Bradley, former head of American Century Ventures, a division of a midsize Kansas City investment firm, “So I had to change the rules.” ... "
WHY?:
" ... Bradley was among the first traders to explore the power of algorithms in the late ’90s, creating approaches to investing that favored brains over access. It took him nearly three years to build his stock-scoring program. First he created a neural network, painstakingly training it to emulate his thinking—to recognize the combination of factors that his instincts and experience told him were indicative of a significant move in a stock’s price. (Salmon, Felix. December 27, 2010. wired, HERE) ..."
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