The financial system of the world and the curious case of the Hakkar

by eskokilpi

Jeremy Grant and Michael Mackenzie write in today’s Financial Times about the software driven trading of shares. Software codes, algorithms, have become a common way of trading shares and derivatives. A string of code decides when, how and where to buy and sell financial instruments such as options and futures. No human intervention is needed.

Stock exchanges are at the moment building data centers where traders can place their computers containing their trading software. The exchange has a matching system that takes in and connects the “buy” and “sell” orders. The reason for the computers being at the same server farm is to save time. Buyers and sellers can now save milliseconds from the time it took to complete a trade over the network.

Technology has advanced so rapidly that financial markets are largely driven by computers instead of human beings.

The way many algorithms work is that some event, such as a news article, triggers the decision to trade. Another string of code seeks where in the world the best price can be found. The software technology behind this is so advanced that literally thousands of orders can be sent to the matching engines in a fraction of a second.

The technology has brought with it high frequency traders. They seek to make a profit from the opportunities that are presented by very small price changes lasting less than a second.

On September 13, 2005 World of Warcraft opened up a new area for advanced players. It was inhabited by a massive winged serpent called Hakkar. One of the tricks Hakkar had was the capability to spread a contagious disease called “corrupted blood”. The special thing was that when a player was infected, other players nearby also caught the disease. This was intended as a minor hindrance to the skilled players who had teamed together to fight Hakkar. Anyway the avatars in the World of Warcraft live in the virtual world of software. When they die during a combat, they return to their homes to come back to life and resume playing. No big deal.

This time however, things were different. The players responded to the new string of code in an unanticipated way. Rather than continuing to fight in the closed area, where Hakkar lived, some players teleported themselves to other areas of the game. As a result the infection spread widely through the whole virtual world. What the programmers intended to be a new challenge for advanced, powerful players in a localized area turned into a global epidemic that rapidly killed hundreds of thousands of weaker players. The programmers had no idea what was going on. Nothing seemed to work as they tried to regain control. Ultimately, the programmers resorted to a strategy that may not be an option for the global financial system. They pulled the plug on the whole world. They rebooted the servers and the epidemic died out.

The virtual financial system of the world affects the physical world outside the digital areas reserved for powerful, advanced players. It is a pity there is no plug to pull when hundreds of thousands of weaker companies start to die as a result of “unforeseen programming issues“.

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Thank you Jeremy Grant and Michael Mackenzie

More on the subject:

On algorithmic stock trading