The Techno-social link at the heart of the crash…
March 4, 2007
We’ve been hearing a lot about the possibility that the latest crash was, at least partially, computer-led. One report that I saw, however, draws a slightly more complex picture, that is worth our interest as sociologists of financial markets. This taken from a Newsweek story:
“On Tuesday at around 2 p.m., the market’s extraordinarily heavy trading volume caused a delay in our trading system,” explains a spokesperson for Dow Jones & Co., the media company that manages the index of 30 blue-chip stocks. For 70 minutes, a slow data feed to the Dow Jones industrial average (DJIA) calculator meant that traders were working off a slightly outdated set of numbers. When the error was caught, the system was switched to a backup server that immediately readjusted the figures—sending numbers across the board into a free-fall plunge of 178 points in a single minute.
“When they put the backup system in, [the market] went kerplunk,” Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc., tells NEWSWEEK. “That just scared the heck out of a lot of folks. […]” [T]he eye-popping adjustment helped lead to the market’s biggest single-day drop in almost four years, a total decline of 416 points.
Of course, this is only part of the story, but we can see that at least in this case it was not ‘the computers’ that are to blame in the crash, but the dependence of market participants on the efficiency of the computerised order-routing system. In other words, the traders got used to an immediate connection between price-changing information and the prices they got from the system. So, when the system ‘jumped’ and prices dropped suddenly, the reaction by many was to sell.