The good news is that if a catastrophic event destroys mankind our investments will be extremely well managed after we are gone. The bad news is that the computers doing it may be trading for their own accounts instead of ours.
This theater of the absurd scenario might be more plausible than you think, and occurred to me last week when our stock exchanges mysteriously melted down in the space of a few minutes.
I’m currently reading David Hoffman’s Pulitzer prize-winning book “The Dead Hand: The Untold Story of the Cold War Arms Race“. Its cheerful title is taken from a Soviet weapon system designed to have computers automatically fire a massive retaliatory nuclear strike at the US if Soviet leaders were ‘decapitated’ by an assumed US first strike.
The Soviets referred to a semi-automatic defense plan as the “Dead Hand.” The Dead Hand was a system that would fire a portfolio of SS-18’s on to the United States and Western Europe if its sensors made the conclusion that the Kremlin had been destroyed by a nuclear blast. The system was in place as early as the mid-80s. It is a bit of a miracle, given the demonstrated shortcomings of Soviet engineering, that it never made a mistake.
The Soviets claimed that they never actually set up a completely automated system, but instead would have had (surviving) lower level officials make the final decision on whether a strike was to be launched.
In any case I was struck by a parallel in last week’s breakdown of the US stock market. As I write this the SEC has still not tracked down the specific cause of a 1000 point drop in the Dow that reduced a number of Dow Component stocks to pennies a share in the space of a few minutes. Everyone breathed a sigh of relief when, a few moments later, the market recovered as mysteriously as it had plummeted.
F2U Rio Linda, normally a quick recovery after a market drop is called Dead Cat Bounce by investors. So let’s refer to this event as a Dead Hand Bounce in homage to the anonymous computers that caused, and then corrected, the disruption.
Although the real cause of the market dislocation is still unknown, what is clear is that a number of computers were at the scene of the crime. And those computers place their trades so fast there is no way humans can be involved in real time to supervise.
By late Sunday, a cause of the slide hadn’t been determined … Still, some new details about what happened during the brief span Thursday afternoon that sent the Dow Jones Industrial Average into a nearly 1,000-point tailspin continued to emerge over the weekend …
But it is becoming clear that much of the decline was because of glitches in how the market functions. High-speed electronic trading, long held as a boon that has made the market more efficient, can also trigger sharp selloffs that overwhelm the market.
Although everyone is relieved that this storm has passed, it reminds me of a that old saying, “Problems that go away on their own, come back on their own.”
And now that hackers know what’s possible, they will have begun working on their own version of the Dead Hand.
I wonder what they’ll call it.