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Neil Johnson: Right—if every time I look at [the market] it’s doing OK, because it’s done something nasty when I blink, is it really OK? Well, we decided to track these ultrafast spikes and crashes through the 2008 crash everybody knows about, and we were quite amazed by what we found: not only did these spikes and crashes accelerate, they started escalating up to about a year or a year and a half before the crash. And if you look at the companies whose stocks had the most severe escalation of spikes and dips, it’s Morgan Stanley, Goldman Sachs, Wells Fargo, J. P. Morgan, Bank of America, Lehman Brothers…Was it that these algorithms foresaw that these companies were in trouble, like animals before an earthquake, or is it possible that they contributed to the crisis?
What we believe is happening is that these algorithms, which have of course been written by humans but [operate independently], worked it out that there was a weakness in the financial sector almost a year beforehand. I’m not necessarily saying they caused it, but they certainly saw the gaps starting to appear and getting wider… So those mobs were then forming more and more frequently in the buildup to the crash.
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We’ve checked around these flash crashes and, again, we do see a pickup of the ultrafast spikes and dips around those. So yes, I think it’s all part of the same thing. [Economists] always come up with some kind of good reason why a certain flash crash occurred; there’s a tendency to always point the finger at one object. But an ecology gets pulled down not because of one object but because of interactions and their collective behavior. If I go out onto the [highway] and I’m a car in a huge pileup, is it my fault? Yeah, maybe—I’m there. But so is everyone else.What do you think of the HFT tax that Italy just passed? Will it be a problem if other countries adopt it?
I think that the tax idea is a bad one. It raises all sorts of questions, like who will be taxed? Entities that trade a stock of a company which is based in that country, or the owner of an algorithm who happens to have an office in that country, or owners of algorithms whose trade is implemented on an exchange in that country? And what happens when trading fully migrates to a “cloud” form in which no one really knows where anything “is”?It’s been reported that you are looking at how your work could apply to cyberwarfare. Does this mean that you’re supposing similar algorithms could be applied to different sets of data and that this might be a major problem?
I think there’s a distinct possibility of algorithms being used as a weapon. Instead of having one person or one program attack an infrastructure, why not send a swarm of these algorithms? If I were an infrastructure and I was being attacked by a loose group of algorithms that weren’t really connected to one another—almost like a cyberinsurgency—how do I best defend against that? And if that attack is happening at a scale of under a second, I can’t be making decisions. I’ve got to write an algorithm, or a set of algorithms that do that.It sounds like in those circumstances, unlike in the markets, algorithms could get more complex and thornier.
Absolutely. The technology exists in computer science to write what’s called genetic algorithms—it’s very easy to have an algorithm, when something hasn’t worked out for it, combine with another algorithm to produce an algorithm that is optimized when compared with the first two. You combine two pieces and you get something “better” in the new generation… Then you’ve got the problem of, if something goes wrong, you ask, “Who put that algorithm in there?” And everyone says, “Not me.” Who knows where that would head? But that’s what happens in an ecology—in the end, species combine, you get mutants.If you were in charge of the stock market, what sort of regulations would you put into place?
I’d get people who did this kind of algorithmic coding, and I’d build a lab that mimics the market. Just as biologists build miniversions [of ecologies] in labs to try to understand the complex things at play, that’s what I’d do. I wouldn’t try to regulate [machine trading] out, I wouldn’t try to tax it out, I’d try to go with it and try to see one step ahead of it.