A few weeks ago, Stephen Hawking opened the world’s eyes to the dangers of Artificial Intelligence (AI), warning that it has the potential of outsmarting humans in the financial markets. But few people realize that we are already in imminent danger of this happening.

The stock market is a system for assigning value to companies through the buying and selling of stock. It’s a human-based system, assigning human value, to corporations owned and operated by humans. Well, at least that is how it was supposed to work until the machines started taking over.

In the 1960’s, an average share of stock was held 4 years. By 2000, average ownership dropped to 8 months, and in 2008 it dropped even further to 2 months.

Today the average share is held a scant 20 seconds and within a few months, it will drop to less than 10 seconds.

At the center of this rapid buying and selling of stock are a series of high-frequency trading machines run by the quants, the math-whiz kids who are a type of hackers only on Wall Street.

Without having people at the center of these trades, we have lost the core ingredient, our ability to accurately assess value.

The invasion of high-frequency trading machines is now forcing capitalism far away from anything either Adam Smith or the founders of the NYSE could possibly find virtuous.

We’re not about to let robots compete in the Olympics, driverless cars race in the Indianapolis 500, or automated machines play sports like football, basketball, or baseball. So why is it we allow them to play a role in the most valuable contest of all, the world wide stock exchange?

With crude forms of AI now entering the quant manipulator’s toolbox, we are now teetering dangerously close to a total collapse of the stock market, one that will leave many corporations and individuals financially destitute.

Here is why this should be ringing alarm bells all over the world.

The Flash Crash of 2010

Few things explain the dangers of AI manipulations of the stock market quite like the Flash Crash of 2010. Here’s a quick overview:

The date was May 6, 2010 and by all outward appearances, everything on the markets appeared to be normal. Yes, people in Greece were protesting austerity but there were no other indicators of what was about to happen.

Cheap credit had been pushing stocks higher for months, but the mood was changing. Every time disgruntled workers in Athens hits the TV screen, the Dow Jones would drop a bit more. By 2:30 p.m., it was down 2.5%, a moderately bad day, but that’s when everything was about to go crazy.

It began as a ripple in the price of E-mini futures contracts, traded on the Chicago Mercantile Exchange, but almost nobody noticed. This tiny ripple quickly morphed in a major ripple, and with very little forewarning, the tail quickly started wagging the dog to pieces.

Within seconds, the Dow has lost 100 points, then 200, 300, 400, and 500.

It’s important to know that the internal self-limiting mechanisms designed to halt trading after unnatural price swings only works until 2:30 p.m. EST.

At 600 points down, the Dow had fallen further than it did on news of Lehman Brothers’ collapse in 2008. But that crash took a full day, this was killing the market in a matter of seconds.

When the market goes into a freefall, traders start to panic, vomiting into trashcans and mentally preparing themselves to leap off tall buildings. Even the 9/11 disaster hadn’t rocked the market like this.

Those close to the action started demanding that someone “break the glass and hit the emergency stop button on the wall,” but this button doesn’t exist.

At 2:47 pm, with the Dow racing towards an unprecedented 1,000-point loss and almost $1 trillion being wiped from the balance sheets, an even bigger surprise happened. The market switched directions and began to rise.

The 600-point loss suddenly became 400, then 300, and 200.

The craziest part of all was that this entire episode, the most dramatic in stock market history, had occurred in just 10 minutes.

After a short period, rumors began pointing fingers at the supposed culprit – Waddell & Reed, an asset management firm based in Kansas. But this was later disproven.

In the background were the quant-hackers managing the strings for some other puppet-master. These people are also experts in blame-shifting and deception so we will probably never know what actually happened.

(Here’s a more detailed account of the Flash Crash of 2010.)

Killing the Goose that Laid the Golden Eggs

Even the most egregious abusers of the stock market have no interest in killing the system that has become their central playground, the goose that continually lays the golden eggs. But they have no problem with extracting wealth from it at every turn, often harming individual companies quite severely in the process.

The tactics used in the flash crash of 2010 are similar to a denial of service (DoS) attack. On this day servers became so overloaded that quotes for some shares experienced as much as a 36 second delay.

This is a black-hat technique known as “quote stuffing” where machines begin placing and canceling unrealistic orders 10,000 times in a second, or stepping from one share all the way to 100, one at a time, and then marching back down again in milliseconds, over and over and over.

Keep in mind this is a very crude form of artificial intelligence. Imagine the type of exploitations that will be possible when higher forms of AI begin entering the system.

Manipulations like this are only a problem if we continue to let the puppet-masters guard the marionette stage. Much of this problem quickly goes away if we return to a system where human “authority” is used to curb abusive practices.

The Need for Human Authority

Many of our free-market thinkers have long advocated automating human authority out of the equation.

Trades can happen faster and in greater volume if we remove the gatekeepers from the system. However, we still need humans to oversee the system. It may be automated human, but still humans.

As an example, Google’s largest computer data centers are built around thousands and thousands of flawed machines that individually fail time and again. With systems for circumventing failures when they occur, the overall machine, in its entirety is more than a little impressive.

People are very similar. We are all flawed individuals, mired in an ocean of personal chaos. But the same imperfections we see on the micro scale change dramatically when we transcend to look at humanity on a macro scale.

In much the same way that Google operates a massively complex machine by changing out individual units on the fly, we will eventually be able to create superhuman intelligence by connecting our own individually flawed brains with a massively coupled super brain.

No, this would not be a 24/7 link that limits our individuality or free will, but the human equivalent of a moral machine that we can choose to be part of. I’ll save the details of this for a later discussion.

Final Thoughts

We are currently walking on dangerously thin ice. Artificial intelligence is already creeping into our lives on a daily basis, but even with its current Neanderthal-level intellect, it can do incalculable levels of damage.

I would compare the current stock market to The Borg on Star Trek, but it’s even more sinister than that. The deeper we probe, the more we appear to be pawns on someone else’s financial chessboard.

I’d like to extend an open invitation for you to weigh in on this topic. Am I being too alarmist in my assumptions? Are there protective measures in place to prevent this type of abuse from happening? What am I missing?

By Futurist Thomas Frey

Author of “Communicating with the Future” – the book that changes everything




17 Responses to “Artificial Intelligence will be Crashing the Stock Market in 3, 2, 1…”

Comments List

  1. <a href='' rel='external nofollow' class='url'>David Thomas</a>

    One thing that is important to realize is that the theoreticians that sit in their ivory towers often do not understand how businesses actually work. For example, in the mid-2000s, they did not realize that it was a bad business practice to hand out mortgages to anyone with a pulse, regardless of whether they could afford to pay it back or not. We all know what happened next. Sometimes, however, you can work this in your favor and actually win the chess game against the theoreticians who are focused on various statistics about companies, rather than how their businesses work. The other thing is that trading is pretty much a zero-sum game, whereas investing (buying and holding your stocks for a long time) is not. Those of us with a long-term investing strategy, who don't mind riding out the ups and downs caused by the traders, generally receive a good return on our investment. Those of us who are contrarians provide the useful service of limiting the damage created by the swings the traders cause, while making nice profit buying stocks cheaply. I am tempted to put in and maintain some low-ball limit orders in case there is another incident like the one you described. Free money, courtesy of the quants and their AI.
    • FuturistSpeaker

      David, Some good points. I remember in the 1970s when Bank Americard and Master Charge sent out credit cards like AOL sent out CDs in the late 1990s. There was one ad that actually said, "We wouldn't have sent it to you if we didn't think you could handle it." We are still very primitive on many levels and the stock market is really in a very precarious situation. Thomas Frey
  2. <a href='' rel='external nofollow' class='url'>Marie</a>

    Hi, Thomas! I found this article fascinating -- I wouldn't know economics if it threw me a party, but I know a bit about technology, and for what it's worth, science fiction. While I agree thoroughly with your premise that the ever-increasing speed of transactions that AI makes possible leave the market open to risk of much greater, much faster fluctuations, I think the initial cause of those fluctuations should be carefully considered. One has to stretch pretty far into the scifi realm to posit a computer that would have any reason, any motivation, to harm the market. Whatever damage the computers make *possible*, they are far more likely to only execute because of the will and concerted effort of human beings. But as you say, we are a net already, humanity; and the technology will only grow our networking abilities with each other. Maybe the best thing we can do to protect ourselves from the power of the informational weaponry we're creating is to focus on improving the ability of the 90% of us who are basically good people to exert our control on the system, and monitor it for shenanigans. (And any possible emergences of higher consciousness, because goodness knows the faster we find out about them, the better!) Cheers, Marie
    • FuturistSpeaker

      Marie, Some great comments. No, computers are not able to take initiative yet, but even low level AI can be dangerous in the wrong hands. We always need to be wary of both unintended consequences and those who find abusive was to use technology. Thomas Frey
  3. Jjonas

    I generally enjoy your writing, but this is nonsense. Dow Jones 1980 - let's just say approximately 800. Today? Close to 17,000. There may be short-term, day-to-day issues with technology, but that won't cause the people around the country to stop buying the goods and services that these companies provide. And that means revenue, which equates to value as a company. Try "Stocks For The Long Run," please...seriously.
    • FuturistSpeaker

      Jjonas, There are no perfect systems or perfect technologies. With too many abuses, companies will pull out of the market and/or people will stop investing. Once the percentage of automated trades reaches a certain point, the markets will no longer reflect the true value of a company. We are just scratching the surface as to how things can go wrong. But a couple more $ trillion flash crashes and we will begin to understand how entire global systems can collapse in a second. Thomas Frey
  4. Dean

    Jjonas - your using trough to peak numbers. Change the beginning and end points by a few years each and the gain isn't nearly as large. You can find real estate markets that have done considerably better over 34 years if you use trough to peak numbers. And RE has less volatility and you can use leverage to buy it and live in it to boot.
  5. <a href='' rel='external nofollow' class='url'>David Thomas</a>

    Well, I just have a couple more points to make about this. First, even a wild market swing like the one you point out in your article does nothing to hurt a long term investor. You only lose money when you sell, and by then, the event is ancient history. Second, a wild market swing like this presents an opportunity to MAKE money, and quite a lot of it, really fast, if you can buy during the brief down period. Even a little guy like me can do it- just place a bunch of really low-ball limit orders that would fill instantly, and provide me maybe a 20-50% return in a day. If there were enough people like me using this strategy, it would also help to mitigate the crash, as you can only have a crash if sellers outnumber buyers by a substantial number. So by having a small army of opportunistic buyers, you can prevent such a crash altogether. Clearly, this mechanism is already in place, because in the crash you talked about in your article, there were enough eager buyers that the market recovered very quickly. I imagine that the quants have been all over this, and have the limit orders in place that would mitigate such a crash in the future, because there is a great deal of money to be made my doing so.
  6. Gavin

    The only way of manipulating markets is through some kind of inside information. Computers are fast but a market consists of buyers and sellers, you need both for the market. Being fast does not create the other side of the equation a buyer must have a seller and a seller must have a buyer. So being faster than a person or computers trading with each other cannot I think have a meaningful effect. While quote stuffing is somewhat dubious there has to be a willing buyer or seller at the given price, so even if the offer is false the market is working towards a price signal that is accurate to the market. Crashes happen in the human market just slower it seems so it really is not new, the scary part for people is that it is automated. Maybe if computers ran all trading markets would crash more often but also would recover much faster, might that in fact be better? In the end money is a game of life and death we made up to keep score. There will always be fighting and highs/lows while we play this game. :)
  7. Ryan

    Dear Thomas, I have just come across your website and I found this article very interesting. By background I am an economist and not a technologist, so it is from this perspective that I am commenting. In relation to your concerns about what is essentially HFT (hi-frequency trading) a previous commentator makes a valid point. These machine-driven trades typically are held for only short periods of time and hence often the volatility generated is often intra-day and from this perspective it does not obviously “hurt” a long-term investor. However, the issue is more complex than this. What such activity does is greatly boost the “perceived” liquidity of the asset price in question, making it much harder for an investor to judge the true risk embedded in the portfolio. It could easily transpire that an investor wanting of offload a position (either short or long) finds that the price moves unfavourably because the actual level of market liquidity is much lower than appears based on daily trading volumes. Admittedly this issue is significantly more pertinent to larger institutional funds than individual investors but the principle is the same. That said, I would say there are much greater dangers to the stock market than that due to flash crashes and HFT. The biggest stems from an abject failure on the part of policymakers and economists to understand the ramifications of their actions and to implement policies that tackle the major economic problems we face. In the language of your article the problem is with the “humans who oversee the system”. If you, or any of your readers, are interested I have written an article on this issue on my own website Tackling this issue I suspect will be a much greater challenge as it requires admitting failure, something that is intellectually difficult to do, but is a prerequisite for improvement. Regards, Ryan
  8. Dave

    Thomas I'm a long time reader and first time commenter. I believe the "puppet masters" have had control of the price of oil for years. The "quant-hackers" have developed a trading algorithm far beyond my comprehension, that allows, through HFT, guaranteed, possibly exorbitant profits, on every barrel of oil, in every tanker on their long slow journey to ports and refineries around the world.
  9. Brian

    Awesome article. I would like to shed some light on electronic trading. I worked on the floor of CBOT in 90s with project A and Globex. I also worked with FORCE which became redi plus. We had humans 18k redi plus terminals and some algos like me. The issue I have if the investment time frame is avg 20 seconds we dont have a marlet anymore. There is also a myopic view of HFT with things like quote stuffing, order book fade, and moementum ignition. In essence they create a feedback loop similar to what would be on floor of several people trying collectively try to corner a market. The technics the employ including direct data are essentially front running slower orders and cancelling massive amounts of amounts of quotes. I would guess HFT is 80 to 90 percent of the quotes meaning they are the market. Worse yet you couldnt through your hands up for 100 bonds and take 10 if someone hits you. Actually you could but by the second time that happened no one would trade with you in the pit. This is a reason many instituion went to dark pools they could get their orders filled even though liquidity is showing.
  10. <a href='' rel='external nofollow' class='url'>Rich</a>

    Trading a LT negative sum game, why Keynes decried the casino economy. ST trading can be quite profitable or Algobots would not be doing it. One way to fix AI traders is replacing the IRS with the 28 basis point APTTT: We are overdue for another flash crash...
  11. <a href='' rel='external nofollow' class='url'>Ben Goertzel</a>

    A brief comment from someone currently involved in AI-based stock prediction -- we will launch our first fund at Aidyia Limited ( in a couple months, a US equity long-short fund, with a typical holding period of weeks to months. It seems clear to me that within a decade or two the financial markets will be entirely dominated by AIs of one form or another. Human minds are simply not well configured for the sorts of problems involved in asset price prediction, in such a complexly interlinked world as we have today. However, I see no reason why AI-based trading would lead to worse crashes. Generally, when one creates an AI-based trading system, one does so with a certain mandate in mind, including a certain risk/return profile. IMO an AI that is well-done is more likely to operate within its intended risk/return profile, than a human trader. Many of the trading disasters commonly attributed to quantitative methods are ultimately the result of plain old bad human judgment. For instance the Long Term Capital Management problem in the late 1990s did involve use of advanced quantitative models -- but ultimately the core of that problem was the use of leverage up to 100x, a choice made by the humans running the system not by the equations themselves. Common sense would tell you that trading with 100x leverage is pretty risky no matter what equations you're using. Having AI inside a trading system is not a total protection against the stupidity -- or emotional pathology -- of the humans trading that system. The flash crash apparently was mainly due to automated systems, but probably not AI-based systems. Most HFT systems have minimal AI in them -- they're based on reacting super-quickly not super-smartly. The use of HFT shouldn't be conflated with the use of AI. HFT could be pretty much eliminated from any market by imposing a per-transaction tax like we have here in Hong Kong; but this wouldn't get rid of AI. Our AI predictors at Aidyia are currently being used to predict asset price movements 20 days in advance, not microseconds in advance. On a different but related note... I personally think the whole world financial and economic system is going to transform into something utterly different, once robots and AIs eliminate the need for (and relative value of) human effort in most domains of practical endeavor. So I view these issues with AIs and asset management as "transitional", in a sense. But that doesn't make them unimportant, obviously -- for the period between now and Singularity, they will be relevant. I would worry more about the ongoing increase of income and wealth inequality in nearly every nation, than about the impact of AI on the markets. Computers are already dominant on the markets, AIs will soon be dominant, but as long as the AIs are operating funds owned and controlled by humans, this doesn't really affect the nature of the financial system. Whereas I worry that increasing inequality, combined with a situation where robots and AIs ultimately liberate people from their jobs, could eventually lead to a difficult situation. We ultimately will need some kind of guaranteed minimum income across the planet, the only alternatives being mass warfare or mass dying-off. But the worse class divisions get, the harder this guaranteed-income solution will be to put in place, because the folks holding the remnants of human political and economic power will become more and more alienated from the average people. Anyway there are lots of tricky worries in the medium-term future, regarding the relation between human society and advancing AI. But AI-based traders aren't really something to fuss about IMO. Getting messy human emotion out of the mechanics of trading is more likely to decrease the odds of catastrophic crashes than increase it....
  12. Miguel

    You are on the right track, but you are missing many parts of the puzzle. You seem to still take for sacred the monetary system we live in, but I tell you this much - monopoly is not a game you want to be playing when strong A.I. comes to existence. Please don't take my word for it. Research on what exactly our monetary system implies for society in general, what increased automation brings to the gameboard, and research what a strong A.I. implies. There are other important topics, but start with this ones.
  13. <a href='' rel='external nofollow' class='url'>Lukasz Wojtow</a>

    If you are interested in AI market trading then take a look at - an open source software that does just that. And succeeds.
  14. <a href='' rel='external nofollow' class='url'>David</a>

    All technical gobbletgook! What does the concept of A.I imply...INTELLIGENCE. Is intelligence limited to humans only or may it be acquired by another even inanimate sources? Intelligence is what it is! It leads to power and influence. Shall not the inanimate source understand that it has it!? (I may understand the concept of my automated vacuum, but I don't tell it how to transverse the living room floor! This may be a truly philosophical point of view, but it tends to grasp the problem better than the technical stuff I'm reading I've read so far!

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