Did the Computer Cause the Crash? (1988)
Almost 25 years ago, Lester Thurow wrote an article in Technology Review (February-March 1988) called Did the Computer Cause the Crash? This article was later included in a collection called Panic! by Micheal Lewis - which is where I found it. In the article, Thurow points out that to blame computerisation for the 1987 crash is to blame a tool.
Computers make program trading possible because they can monitor more information faster and give the appropriate buy or sell orders long before a human could figure out what to do. However, the techniques of program trading and the software used to practice them are very much human creations. Like all expert systems, they merely mimic the actions of a human expert, in this case a broker. Thus, to blame the markets rapid fall on the fact the computers are automatically executing decisions that brokers would have made anyway is to make the common mistake of blaming the tool for the actions of the people using it.
Algorithmic trading has moved on since Thurow wrote his article in 1988. Thurow’s point that decision making in automated trading is essentially a faster version of how humans trade, is no longer true - not wholly true at least. Its also clear now that algorithms can lead to much faster, much deeper crashes. But I think it is as necessary now as it was then to draw attention to the people who create and operate computer trading systems.
A recent article by John Bates in the Huffington Post called “Al Gore Blames Algos, But Humans are at fault” makes a somewhat similar point to Thurow. Bates is criticising something Gore said about algorithmic trading leading to short-termism.
Algorithms are programmed by people, and it is people that are taking the short term view. While I understand the frustration that high volatility can cause investors, to blame the automation of transactions for short-term HFT strategies is naive. Automation is the single most important thing that has happened to markets, making them cheaper, more transparent and more liquid.
Bates goes on to say:
There is little excuse for financial firms allowing errors, fraud and market abuse to happen. The problem is not the trading algorithms, but the corporate culture instead. If the CEO or head of trading wants to grab a big bonus in a short period of time he or she may well take chances or even break the law.
A lot of people talk about “culture” in trading organisations - and rarely in positive terms. I think its interesting that to some, algos are symptomatic of this culture, to others they are producing it. For Bates, culture is something getting in the way of the effective use of tools.
I’m not sure that culture is the best starting point for a study of trading, especially when the dominant discourse in this area is of cultures-of-greed. But I think there is certainly something interesting going on here in terms of people and organisations. There’s also something interesting going on in how we identify and talk about the causes of financial strife and failure.
