David Brancaccio: Machines — they do such a good job cleaning your dishes or drying your clothes, but what about running your stock market?
Scott Patterson says Wall Street has been taken over by computer-driven, artificial intelligence programs, technology that has left regulators mystified about what’s going on. His new book out today is called “Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System.” Good morning, Mr. Patterson.
Scott Patterson: Good morning to you, David.
Brancaccio: Help me understand your thesis here — something like, robots ate my stock market?
Patterson: Right, well, this has been a dramatic revolution in the stock market that’s happened over the last 10 to 15 years. People actually have no idea, I didn’t have any idea until I started diving into this issue as a reporter at the Wall Street Journal — something like 70 to 80 percent is controlled by robots. And the problem with that is you would think that they would act perfectly rational, but sometimes they just completely fly off the tracks as we saw in May 6, 2010 — the flash crash — the market crashed about 10 percent due to glitches in computer systems across the country.
Brancaccio: You also talk about 10 percent of the stock market takes place in what some are calling “dark pools.” What are those? I know it’s hard to see in a dark pool, I guess that’s the implication there.
Patterson: Well the issue is that investors are increasingly fleeing the stock market because of the actions of these robots on the stock market. They are trying to hide in “dark pools” which are basically private venues where buy and sell orders match up away from the public market — they’re also infested with robots. So there is really no place to hide any more, it’s just been completely taken over by robots. And I really think there’s no turning back, the issue is the regulators need to get a hold of what’s going on.
Brancaccio: Now it is fair to say, Scott, that financial markets had the ability to go out of whack in the pre-robot days. I mean 1929, not a lot of robots at work, but we can get ahead of ourselves and things can collapse.
Patterson: Yeah, and there was Black Monday in 1987 where the market saw its biggest one day collapse of all time. But of course, there’s always going to be market disruptions. What we are seeing now is a very new kind of disruption that potentially could spread to all sorts of assets — not just stocks, but the futures market, the options market or the currency market.
Brancaccio: So you don’t think there is anyway to boot the robots out of this market, but you think more oversight is what’s in order.
Patterson: I think investors feel like things have changed so dramatically. There’s nobody really in control of it and unless they get that faith in the market back, they are not going to come back to the market, and that’s a big problem.
Brancaccio: The new book is called, “Dark Pools: High-Speed Traders, A.I. Bandits, and
the Threat to the Global Financial System.” Scott Patterson, thank you very much.
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