Wow. I’m kind of amazed that the NYSE has the balls to build a huge new datacenter (WSJ was nice enough to crack the story open).
If you’re unfamiliar with how the stock exchange really works, you’d be surprised just how little human interaction occurs in what gets traded and what does not.
How little human interaction, you ask? Well, 70% of all trading is done strictly by computers with complicated programs and algorithms that sift all the available public data about stocks, and then makes trades based on that information.
Think about that for a second. 70% of our entire economy is controlled by a bank of computers.
Now, the NYSE is building a brand new datacenter, they’re giving access to firms so the firms can locate their own servers within the datacenter. What does that mean? All of these same computers will be able to trade at a much higher frequency– orders of magnitude higher– and much more quickly; think in milliseconds.
If this doesn’t concern you, then you’re probably not aware of the inherent fragility in computers, programs, and the good ol’ computer adage “garbage in, garbage out”.
I could very easily see the entire exchange crashing to the ground in a market panic based on computer exchanging, and that’s just with todays current setup.
With the new datacenter, I’d wager that about 90% of all trading will be done by computers. None of which with any human interaction.
Back in September of 2008, a six year old news story about United Airlines’ bankruptcy was accidentally republished on Google News with a current date and timestamp. The automated traders kicked in and began dumping all of United’s stock. The company lost 75% of its stock that day, and about $1 billion of United’s market cap was gone in less than 12 minutes.
Much of the stock was restored by the next day, but imagine if you have almost all trading going in a frenzy over a single news item. One stock is very rarely ever the only casualty.
It’ll be interesting to see how things turn out in the days and months to come.