The Flash Crash

Harbinger of the Future

We have just finished reading Robert Harris's latest novel, entitled The Fear Index.  It is a dystopian work focusing upon the disconnect from reality that is so embedded in global financial markets that no-one knows how to solve. 

Harris describes how he developed the ideas for this new work.  Whilst conducting research in Geneva he saw in real life the theme of his book played out: on the 6th May 2010, he turned on his television to find out

(t)he Dow Jones index in the USA has just lost 700 points in the space of about fifteen minutes.  It became known as "the flash crash": an ominous warning of what can happen when financial markets become overly reliant on computer trading. 

I had been intending to create a fictional financial meltdown, but when I read the subsequent official report on the flash crash I realised that nothing I could invest could possibly do justice to what actually had happened.
  Seventy-three percent of share transactions in New York are now performed by computers.  On that one day, 19.1 billion shares were traded--more than in the entire decade of the 1960's.  And such is the volume and speed of the modern digital markets, the average length of time a share is held in the US is now just 22 seconds.

When trading financial securities becomes an end in itself the end of the system itself is in sight.   The fact that the average length of time a share is held is just 22 seconds indicates that the global securities markets have lost touch with reality, with the real economy, with Main Street.  The coyote has indeed gone off the cliff and is rapidly peddling his feet in thin air. 

It is hard not to be a Cassandra when one contemplates the financial system as it has evolved over the past twenty years--lightly regulated, hugely leveraged, increasingly dominated by mathematicians and physicists, it seems to me to resemble a Frankenstein's monster all of itself: too vast, too complex, too global to be brought under political control.  [Robert Harris, "Afterword", The Fear Index, (London: Arrow Books, 2012)]

The genie is well and truly out of the bottle--something to contemplate as we head into 2013.