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The New Yorker: New ways to crash the market


In the popular imagination, investing is about economic fundamentals. Investors scrutinize companies, weighing factors like cash flow, product lineup, and merger plans. They keep in mind general stuff like interest-rate hikes and what’s happening to the dollar. But most trading these days has nothing to do with any of these things. Instead, it’s all about what the market is going to do in the very short term—often a matter of milliseconds. Most of this trading takes place too fast for humans to be involved, so the decisions are left to computers. Andrei Kirilenko, a professor at M.I.T. and a lead author of the S.E.C. and C.F.T.C. report on the flash crash, told me that the computers look at the market “through a magnifying glass, quickly changing, with every tick up and every tick down.” The robots base their trades partly on factors like price changes and partly on what’s in the market’s “order book”—a virtual log that contains all the market’s buy and sell orders.

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