Machine accidents: When the program does exactly what it was told

Crashes do not always come from human fear. Sometimes, it is the machines that go off the rails.

Today, a large share of stock market orders are placed by programs. They buy and sell in thousandths of a second.

The sixth of May two thousand ten, early afternoon in New York. The market is already nervous, because of Greek debt.

A fund launches a giant sell order, handed to an algorithm. The program sells fast, without looking at the price.

The other machines pass the contracts back and forth, then pull out. Suddenly, there are almost no buyers left.

Within minutes, the Dow Jones loses nearly one thousand points. About nine per cent, without any news.

Some shares trade at one cent. Others at one hundred thousand dollars. Prices no longer make any sense.

Twenty minutes later, most of the fall has been erased. Thousands of absurd trades are cancelled.

But those with an automatic sell order sold at the worst moment, at ridiculous prices.

In the app, this chapter is animated and narrated, card by card. Start free trial.

First lesson: a market order accepts any price. A limit order sets yours.

The first of August two thousand twelve. Knight Capital is one of the biggest brokers on the American market.

That morning, the firm installs new software on eight servers. One of them is not updated.

On that server, old code wakes up. It buys and sells millions of shares, non-stop.

It takes forty-five minutes to understand and shut everything down. The loss: about four hundred and forty million dollars.

Nearly ten million dollars a minute. The firm has to be rescued by investors, then it is taken over.

The fifth of February two thousand eighteen. This time, the problem is not a bug. It is a product.

Listed products let people bet against volatility. They gained when the market was calm, and it had been for a long time.

A daily inverse product does the opposite of its index, each day. If the index rises ten per cent, it loses ten per cent.

Say ten thousand euros in it. If the index doubles in a day, the product loses one hundred per cent. Nothing is left, or almost.

That Monday, the fear index, the VIX, more than doubled. The best known of these products lost about ninety-six per cent.

The next day, its issuer announced it was closing it. That day was called Volmageddon.

Three accidents, one lesson. A machine does exactly what it was told, even when it is absurd.

For you, two reflexes. Limit orders rather than market orders. And never a product when you cannot see how it could fall to zero.