05/17/2010 08:18 pm ET Updated May 25, 2011

Wall Street: Terminators in the Casino

Anyone who's ever seen a Terminator movie knows that civilization ended when a computer system called "Skynet" came alive and tried to terminate the human race by starting a nuclear apocalypse. After last week's "flash crash" on Wall Street, they might have wondered if Skynet wasn't working on a financial apocalypse instead.

We still don't know what happened more than a week later, and a new SEC study will probably raise more questions than it answers. Here's what we do know: Wall Street has become such a high-speed, high-tech gambling house that it can be plunged into chaos without anybody having a clue what's happening or the wherewithal to prevent it. "Real time" - where the effects of ultrafast computer events are perceived at human speed - is never less "real" than it is where Wall Street is concerned.

As a reggae rapper named Big Youth once said, "If you ride like lightning you'll crash like thunder."

You probably know the story by now: In a few short minutes the stock market - supposedly protected by both regulations and sophisticated software - lost 9.2% of its value. There was wild trading in Proctor & Gamble, once the target of 'satanic cult' rumors. (Hmm ...) Boston Beer Company, which opened at $59.44, dropped to zero. Everything returned to something like "normal" eventually, after the "ghost in the machine" returned to its lair.

According to the FOX Business Network, the SEC is about to release a report saying that the 17-minute plunge was caused primarily by "human error." But a number of other theories have also made the rounds, and the SEC report is unlikely to end the speculation. In the past week there has been speculation that:

  • A "fat fingered" employee typed "million" rather than "billion" into a major trade. Something like that will reportedly be the SEC's conclusion. But are these systems really so badly designed?
  • A hacker invaded the trading systems.
  • Algorithmic (computer-driven) trading ran amok.
  • Large banks and traders orchestrated the plunge to terrify lawmakers (who did acquiesce to the banks the next day by killing the Brown/Kaufman "too big to fail" amendment - and consider the chart of high-volume traders that can be found here.)
  • Nassim Taleb, the "Black Swan" author, did it.  (Really!)

This mystery has more suspects than an Agatha Christie novel. And, like an Agatha Christie novel, more than one of the suspects may be guilty. Now some people are pointing fingers at Chicago traders Waddell & Reed, saying that their sale of 75,000 "e-mini futures" contracts could have triggered the plunge. Maybe. But we don't need to name a guilty party to understand the basic facts at work here: First, that computerized trading has turned Wall Street into an uncontrolled computer game, a runaway bullet train with no engineer at the controls. As DK Matai observed, most trades no longer take place in that famous physical edifice on Wall Street. Today 60% of "Wall Street" trades occur in cyberspace, not Manhattan.

And secondly, as Janet Tavakoli put it, deregulating the market lets speculators "bang" or manipulate it, which may have been the point all along. The stock market, once seen as a way to assess the real value of functional businesses and fund them accordingly, has instead become a place where high-speed electronic avatars gamble with real people's dollars.

This is the same fantasy world where four financial giants - Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase - went an entire quarter without losing money in their trading operations for a single day. The chances of that happening by chance in a legitimate system are infinitesimal. But in today's electronic high-speed casino these guys are the "house" - and you know what they say about betting against the house.

John Connor's new assignment: head of the SEC!

Meanwhile the original Terminator, Arnold Scharzenegger, is proposing a California budget that shows how this virtual reality can affect the lives of real people. California -- whose fundraising bond initiative was handled by Goldman Sachs even as Goldman secretly undermined it - is now considering cuts to schools, mental health, aid to the poorest of the state's citizens, state employees' benefits, and home health care for the ailing elderly (which, ironically, will force them into costlier nursing homes). Not under consideration: new taxes on the wealthy, which would affect some of those who profited most from the electronic Wall Street casino.

Why, it's almost as if he's been sent from the future to ... never mind. We do know that his would-be successor, Meg Whitman, spent some time in the gleaming futuristics confines of the Goldman Sachs fortress (until she was forced to resign from the Board over ethical issues).

Wall Street's been a high-risk thrill ride for years, enriching for some but empty of deeper meaning and divorced from underlying value. The "flash crash" didn't break the market, but it did reveal fault lines, especially in the highly speculative nature of so much massive trading. As for those digital or algorithmic trades, they're the dark matter of the economy, making up most of the mass of the market but invisible to the human eye. They race through the Wall Street nervous system as fast as lightning, carrying their owners' bets instantaneously throughout the system. But when the market "crashes like thunder," the big banks and the speculators behind them don't have to pick up the pieces.

We do.


Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

He can be reached at ""

Website: Eskow and Associates