11 August 2007

Stock Markets and the Computer Unconcscious

Decades ago, many stock market trades were executed by traders who sat in a coffee shop across the street from the stock exchange and sent orders to the floor to buy and sell via runners. (The British still call their floor traders "waiters.") About 5 years ago, 80% of trades were done by people. Today, about 80% of trades are done by computers. Sensations take about 500 ms (milliseconds) to reach consciousness. These computer trades take place in reaction times of about 300 ms - faster than the speed of consciousness. What this means is that stock market trades are now driven by what we might call the computer unconscious - an algorithmic update to Jung's collective unconscious.

Is it any wonder that the market seems to move with such frenetic energy - jumping and diving by 1 or 2 or 3 percent a day? Like a kite on a windy day, we watch a year's worth of savings disappear in the course of an hour, only to re-appear and then vanish again before lunch.

The result? A summer clearance - 10 to 20% off all stocks. Sigh.

And the best part of the stock market gyrations is how the newscasters so confidently attribute the movement to "credit jitters," or "profit taking" or "investor confidence." The truth is, no one really knows why the market moves so much in one day. These movements are manifestations of the computer unconscious - driven by inarticulate fears and arcane equations.

[Thanks to my buddy Rick for the stats on computer vs. human trades vs. across the street trades and the little tidbit about the British still calling their floor traders waiters.]

1 comment:

ThomasLB said...

Maybe we should replace the Federal Reserve Chairman with a tiny perl script.