TECHNOLOGY FOR CHANGE

Smarter Technology Tragedies, Part Two

Joe Maglitta | Date: 01-29-10 | Comments: 2

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• System failures in advanced radiation therapy machines and secretive trading programs highlight technology’s -- and users’ -- destructive potential.
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  Table of Contents:

  Smarter Technology Tragedies, Part Two Needed: User-Proof IT

• Smarter Technology Tragedies, Part Two

  
  (This is the second of a two-part series. See also “Smarter Technology Tragedies, Part One.”)

  Most IT people are proud of helping to make the world a better place. And they should be. New technology continues to enable a profound parade of new conveniences (online shopping and charitable giving), productivity (Web collaboration, mobile apps) and better management of water, food, electricity, travel and other necessities. After more than two decades observing the industry, I remain awed by the ingenuity, intelligence and accomplishment of technologists. Each day I am genuinely eager to see how new technology will be cleverly applied to some pressing problem, big or small.

  Yet two recent tragedies—one preventable, one predictable—reminded me this week that increasingly powerful technology requires increasingly greater caution, by creators and end users alike.

  Tragedy 2 - Economic Meltdown Enabled by Geeks

  This past weekend’s Wall Street Journal carried a book excerpt detailing a different kind of programming failure.

  In the "The Quants," set for publication Feb. 2, Journal reporter Scott Patterson explores “how a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street.”

  By now, we are all sadly familiar with the cost of the epic arrogance and greed of Wall Street’s Alpha Geeks: Global economic meltdown and chaos that made “hash of (average investors’) 401(k)s and mutual funds” while wrecking countless homes and jobs.

  What’s interesting here, especially to IT, is a look at the complex automated trading systems used to push mortgage derivatives and other exotics at the heart of the crisis.

  “The fine-tuned models, the bell curves and random walks, the calibrated correlations—all the math and science that had propelled the quants to the pinnacle of Wall Street—couldn't capture what was happening.

  “The entire system started to seize up as the delicate, finely wrought creations of the quants spun out of control. What had started as a series of bizarre, unexplainable glitches in quant models turned into a catastrophic meltdown the likes of which had never been seen before in the history of financial markets. Nearly every single quantitative strategy, thought to be the most sophisticated investing ideas in the world, was shredded to pieces, leading to billions in losses.”

  In other words, all the smartest guys on Wall Street, backed by the most sophisticated computers and modeling, couldn’t put Morgan Stanley’s Process Driven Trading, Goldman Sachs' Global Alpha and other murky trading operations back together again. The former lost $300 million in a day; the latter lost $1.5 billion in a month. You know the rest of the story (so far).

  Patterson notes the “carnage revealed a dangerous lack of transparency in the market. No one knew who was behind the meltdown. … Everyday investors had no idea of the carnage that was taking place beneath the surface.”

  Next: Needed: User-Proof IT >>