Blog: Algorithms Take Control of Wall Street [an example of Holland's Complex Adaptive Systems (CAS)]

Algorithms Take Control of Wall Street
Wired (12/27/10) Felix Salmon; Jon Stokes

The bulk of trading on Wall Street and an increasing volume of global trading is governed by algorithms, and this has engendered a market that is more efficient, faster, and more intelligent than any human. However, it also is unpredictable, highly volatile, and often defies human understanding. Some of the algorithms are designed to discover, purchase, and sell individual stocks, while others were developed to help brokers carry out large trades. Consequently, the trading arena is glutted with competing lines of code, each one trying to outsmart and counter the other. Interaction between the algorithms can give rise to unexpected behaviors, and this can lead to sudden market drops such as the May 6 flash crash. In the wake of this event, the U.S. Securities and Exchange Commission imposed or is considering imposing safeguards such as governors for trading algorithms that would restrict the size and speed at which trades can be executed. But such measures can only slow down or halt the algorithms for a short while. "Our financial markets have become a largely automated adaptive dynamical system, with feedback," says University of Pennsylvania professor Michael Kearns.

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