GLOBAL CHALLENGES

Five Lessons Learned from the Big Glitch on Wall Street

Eric Lundquist | Date: 05-12-10 | Comments

What went wrong to allow for a 1,000-point stock swan dive in the space of minutes (or seconds) on May 6?

Post-mortem time on Wall Street once again. It seems like only a year or so ago that the discussion began, �How could Wall Street spend so much on technology, but know so little about the risk associated with collateralized debt obligation, mortgage-backed securities and lots of�in retrospect�stupid financial risk?� The answer, as it has dribbled back, is that the idea was to get in, get out and make your money before the house of cards tumbled down.

Now, in Version 2.0 of Wall Street foibles, the financial execs and techies are asking, �What went wrong to allow for a 1,000-point stock swan dive in the space of minutes�or seconds�on May 6?� While analysts, regulators and financial pontificators all seem to be coming up with a �What, me worry?� shrug, I�d like to offer up five reasons why I think the volatile stock drop and rise was more than simply a glitch.

1. You can model a fragmented system. The current IT infrastructure model for Wall Street is really no model at all. You have traders and system specialists all fine-tuning their systems to take real-time advantage of tiny stock changes. There is no big system that sits on top of everything to alert regulators in time to react to wild swings.

2. The need for speed. It is a sad fact sometimes, but technology spending gets applied to where you make the most money. You can make money on super-fast trades within a tiny window. You can�t make money on developing systems to monitor these new super-fast trading systems. So, the fast traders can the hot boxes and primo software developers. What do you think that leads to?

3. Markets are created by people using systems to their advantage. The way to make money in markets is to find and fund a new advantage over your competitors. Innovation works both ways: You can innovate to scam a market, just as you can innovate to make the world a better place. The scammers won in this latest round of market volatility.

4. Sometimes you just don�t know what happened. A year or so from now, I�m sure there will be a final report on why the swan dive took place. That report will provide a list of reasons: super-fast systems, trading limits that reacted too slowly or too automatically to market shifts, the lack of regulators to keep up with technology advances. In other words, I doubt anyone will be able to point decisively to what took place on May 6. Sometimes a technology/business mashup just means you don�t really know what is going on in the financial marketplace. No one likes to admit that.

5. In a year from now, another big glitch will surface to roil the financial markets. I don�t know what it will be, but it will be fast and include technology driven by some traders betting on a new scam, and lots of pundits will spend lots of keystrokes trying to figure out what happened. It is all a bit like trying to model the weather: You can be really good at explaining what happened yesterday, but tomorrow�s predictions are at best 50/50.