by Gary North: Cradles
and Safety Net
in Wired reports on the computer programs that buy and
sell capital. A programmer understands his program, but no one understands
how all of them interact. They are autonomous. And they are now
in control of price movements: buying and selling. These are the
algorithems in our lives.
have become so ingrained in our financial system that the markets
could not operate without them. 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.
High-frequency traders, sometimes called flash traders, buy and
sell thousands of shares every second, executing deals so quickly,
and on such a massive scale, that they can win or lose a fortune
if the price of a stock fluctuates by even a few cents. Other
algorithms are slower but more sophisticated, analyzing earning
statements, stock performance, and newsfeeds to find attractive
investments that others may have missed. The result is a system
that is more efficient, faster, and smarter than any human.
It is also
harder to understand, predict, and regulate. Algorithms, like
most human traders, tend to follow a fairly simple set of rules.
But they also respond instantly to ever-shifting market conditions,
taking into account thousands or millions of data points every
second. And each trade produces new data points, creating a kind
of conversation in which machines respond in rapid-fire succession
to one another’s actions. At its best, this system represents
an efficient and intelligent capital allocation machine, a market
ruled by precision and mathematics rather than emotion and fallible
But at its
worst, it is an inscrutable and uncontrollable feedback loop.
Individually, these algorithms may be easy to control but when
they interact they can create unexpected behaviors – a conversation
that can overwhelm the system it was built to navigate. On May
6, 2010, the Dow Jones Industrial Average inexplicably experienced
a series of drops that came to be known as the flash crash, at
one point shedding some 573 points in five minutes. Less than
five months later, Progress Energy, a North Carolina utility,
watched helplessly as its share price fell 90 percent. Also in
late September, Apple shares dropped nearly 4 percent in just
30 seconds, before recovering a few minutes later.
drops are now routine, and it’s often impossible to determine
what caused them. But most observers pin the blame on the legions
of powerful, superfast trading algorithms – simple instructions
that interact to create a market that is incomprehensible to the
human mind and impossible to predict.
This will spread.
As computers get more powerful, programmers will rely on them to
do more of the actual coding.
get more powerful? Oh, yes. Every year, they double their capacity
per dollar. This is Moore’s law. It is explained by the editor of
Wired, Kevin Kelly. Kelly is probably the most thoughtful
magazine editor on earth. He used to edit and publish The Whole
In an article
on his site (www.kk.org), he surveys
the implications of Moore’s law, the law of doubling. It turns out
that it applies to numerous areas of the digital world, not just
Here is what
he concludes. Pay close attention. This is very, very important.
trajectories uncovered by Moore, Kryder, Gilder, and Kurzweil
spin through the technium forming a long thread. The thrust of
the thread is inevitable, its course destined by the nature of
matter and discovery. Once untied, the thread of Moore’s Law will
unravel steadily, inexorably towards its anchor at the bottom
of physics. Along the way it unleashes other threads of technology
we might wish to pull. Each of those threads, of Communication,
Bandwidth, Storage, will unravel in its predetermined manner as
well. We choose how fast to unzip them, and which ones to unloosen
next. Collectively we push and pull with exceeding energy to wrench
the threads from their place, but our efforts only serve to unravel
it as it would anyway. . . .
to the technology, Carver Mead says. What do the curves say? Imagine
it is 1965. You’ve seen the curves Gordon Moore discovered. What
if you believed the story they were trying to tell us: that each
year, as sure as winter follows summer, and day follows night,
computers would get half again better, and half again smaller,
and half again cheaper, year after year, and that in 5 decades
they would be 30 million times more powerful than they were then,
and cheap. If you were sure of that back then, or even mostly
persuaded, and if a lot of others were as well, what good fortune
you could have harvested. You would have needed no other prophecies,
no other predictions, no other details. Just knowing that single
trajectory of Moore’s, and none other, we would have educated
differently, invested differently, prepared more wisely to grasp
the amazing powers it would sprout.
A few years
ago, a friend of mine put one of these laws to work: the one on
wireless. He started with two premises.
will get cheaper.
People don’t like to read.