[The trigger will be , a "surprise" of some sort..]
One possible "surprise" that is not widely anticipated is a technological malfunction in the financial system. Today's markets rely on an extremely complex mesh of data networks and computers, all tied together electronically. When you buy and sell shares, options, etc., you're usually not trading anything tangible, only 0s and 1s (bits) in cyberspace. Also, technological advances have greatly increased trading volumes and dollar amounts, and have led to financial instruments that would not have been possible earlier, such as some types of derivatives. I recommend that people read Joel Kurtzman's book "The Death of Money", about how finance has become virtual, which is already dated, because it was written in 1993.
So, what are a couple of possible scenarios that could wreak havoc on the financial systems? Let's ignore the Y2K issues, because those have already been discussed endlessly.
(1) Communications failure in the data networks used by the markets -- none of the computers at the exchanges or brokerages can communicate with each other. Trades don't make it through the clearinghouses, you can't get accurate quotes, orders can't be relayed. This kind of network outage happens regularly -- for example, last week AT&T's frame relay data networking failed, and 5,000 corporations lost their Internet access for a day or more, including a lot of companies that rely on online sales of merchandise. Or, let's say Hezbollah uses a few small explosive charges and blows up all the fiber optic lines into Manhattan's financial district...
(2) Program trading runs amok. Brokerages are using advanced computer systems and methods like genetic algorithms, stochastic methods, numeric analysis, etc. to spot market conditions and to trade accordingly. Essentially, it's the computer trading programs of one broker doing battle with the programs of another broker. These trading methods are created by guys with advanced degrees in mathematics known on Wall Street as "quants" or "rocket scientists". Now, let's say billions of dollars start getting moved around because a computer program at Morgan Stanley has a "bug" in it, then say Dean Witter's computers notice that Morgan is doing something odd and they start running amok and it spreads like wildfire... Remember a few years ago, when there were intense debates about the wisdom of letting military computer systems decide what to do by themselves in the SDI ("Star Wars") program, and whether we could accidentally get ourselves into World War III because of "technical difficulties"? Now imagine the same danger posed to our financial systems because of program trading malfunctioning.
Paul McGinnis |
