Saturday, February 19, 2011

Forget facebook. This is the world's most influential, vulnerable network

Data is the new oil. That's why the race is on to speed up the financial markets, to a point where I wonder who is still in control. On Friday 18th February, the joint advisory committee of the Securities and Exchange Commission and the Commodity Futures Trading Commission recommended that the SEC consider new incentives or rules that would restrain market strategies commonly used by high-speed trading firms. About time.

This joint committee was established a few days after a major technical meltdown back on May 6 2010. It was the second largest point swing, 1,010.14 points and the biggest one-day point decline, 998.5 points, in Dow Jones Industrial Average history. It sent the Dow Jones industrial average plummeting nearly 1,000 points in less than a half-hour.

Now, after several months of investigation by the SEC and the CFTC, they seem to have determined that the so-called "flash crash" occurred when a trading firm let loose a computerized selling program in an already stressed market. According to AP, the firm's trade, worth US $4.1 billion, led to a chain of events that ended with market players swiftly pulling their money from the stock market, the agencies' review found.

Compare that with the news that the world’s financial markets took another big step last Tuesday with the announcement that NYSE Euronext and Deutsche Borse are merging. As the Muckety Map above shows (Click the tools on the left hand side if you really want to play with the map full screen!) the US$10 billion stock deal comes on the heels of a similar deal announced two weeks ago between the London and Toronto stock exchanges. Four months ago, the Singapore stock exchange said it would buy the Australia exchange. Remember that 2007 merger between the NYSE Group and Euronext? Euronext had previously acquired exchanges in Lisbon, Paris, Brussels and Amsterdam, as well as the London International Financial Futures & Options Exchange.

So as more and more of the exchanges get interlinked, and seem to be trading at ridiculously high speeds, to what extent are humans (especially the regulators and small investors) still any part of the equation? High Frequency Trading is becoming very difficult to regulate. Based on the number of shares traded a day that means we're seeing on average 6,944.444 shares being traded a minute or 115,740,74 shares per second. Personally, I am concerned that this is the makings of the next world economic meltdown. Suppose these connections go down again, surely the impact will now be even worse? This article increased my fears rather than reduced them. This is the next James Bond plot! Thanks to for the background research.

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