A good standby for science fiction is the computer gone haywire — think 2001: A Space Odyssey or War Games. It makes for great entertainment, but not so fun when they become part of the real world.
Just look at the financial markets lately. Most recently we just saw a clerical error on the Tel Aviv Stock Exchange wipe out almost the entire market cap of Israel Corp. and take the exchange down about 2.5% in a five-minute period. But that’s just one in a slew of high-profile glitches and typos that have led to disturbances and even crashes:
- Facebook IPO: Nasdaq OMX Group (NDAQ) worked hard to get the listing, but the exchange should’ve spent more time with the infrastructure. The IPO was delayed by a grueling half-hour, and more than 30,000 FB orders got stuck in the system, leading to trading losses totaling in the hundreds of millions. A few weeks later, Nasdaq CEO Robert Greifeld issued an apology, blaming “technical problems” for the botched IPO and promising to invest more resources in the exchange’s infrastructure. About a year later, the SEC issued a stinging report that blamed Nasdaq’s “poor systems and decision-making” for the botched IPO.
- Another Nasdaq Blunder: Of course, last week the exchange was halted for about three hours thanks to a bad data feed that provides quotes.
- Goldman Sachs: Goldman Sachs (GS) likes to tout its strong risk-management capabilities, but they’re far from foolproof. Last week, GS lost tens of millions of dollars because of a trading accident … that ironically came about from a system upgrade.
- Twitter: In April, a hacker took control of the Associated Press’ Twitter account and tweeted that President Obama was injured because of a terrorist attack. The Dow fell by 145 points.
- Knight Capital Group: On Aug. 1, 2012, a malfunction caused a disruption in trading of 148 companies on the New York Stock Exchange. Knight Capital Group called it a “technology breakdown.” It also meant the collapse of Knight’s stock price (the trading losses came to about $500 million). Ultimately, the company had no choice but to sell out to Getco LLC.
- BATS: Alternative stock exchange provider BATS, in an effort to spur growth, built a platform for issuing IPOs. Its first deal: an offering of BATS shares to the public. But within a few seconds of the deal, the computers went berserk and sent shares to a fraction of a cent! The mayhem even triggered a suspension of trading in Apple (AAPL) after it plunged 9%.
- Flash Crash: May 6, 2010, will live in financial infamy. That’s when the Dow Jones Industrial Average plunged almost 1,000 points within a few minutes. It’s still not clear why this happened, but one theory is that a fund initiated a huge number of sell orders on the futures markets, which attracted hoards of high-frequency traders who pushed the prices down even harder.
The problem is, as computers continue to take more control over critical functions, these issues are becoming more norm than exception.
To get a sense of how we got here, you should listen to someone who knows quite a bit about technology: Virginia Rometty, current CEO of IBM (IBM).
She believes computing has undergone three eras. The first came about in the 1950s and was focused on “Big Iron” machines that generally tabulated information. The next era, which came in the late 1970s, involved the surge in programmable desktop and minicomputers. It also led to the emergence of the Internet.
Now we are moving into the cognitive era — that is, a focus on computers that learn and make decisions (such as Watson).
The cognitive era has many key drivers like mobile, social, the cloud, Big Data and artificial intelligence. Consider that every two days, the world creates as much data as the world did in 2003, leading Rometty to call data the “world’s next natural resource.”
While the cognitive era is spurring about new riches — take a look at companies like Salesforce.com (CRM), Workday (WDAY), Splunk (SPLK), Facebook (FB), LinkedIn (LNKD) and Zillow (Z) — data as the next natural resource puts even more responsibility on technology companies and their products to avoid major problems.
Unfortunately, we seem to be making more and more fumbles.
I’m clearly not a technology Luddite. In today’s world, new innovations are critical for economic growth. But there has to be more investment in risk management, testing and monitoring. Continued malfunctions could further scare off investors, not to mention there are much broader implications outside of Wall Street. Imagine if your automated home locked you out? Or your whiz-bang car suddenly went berserk?
Institutions like the Nasdaq and NYSE have to learn in a hurry just how dark technology’s dark side is. If not, those entertaining sci-fi flicks might turn out to be prescient forecasts of the future.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.