For those alien or not inclined to mathematical thinking an algorithm is little more than a convoluted and complex operation to calculate something, although they really move stock exchanges. A statement like this could sound exaggerated but the European Parliament and the EU’s governments have just signed an agreement to develop a law that reinforces controls over high frequency computerized stock exchanges trading, in order to avoid a new flash crash or sudden collapse such as the one that affected US market in May 2010.
The rule will have to be approved by the European Parliament and also by the EU’s ministers of economy which team the Ecofin. According to the law, any investment company which recourse to this kind of trading will need to have efficient systems and controls such as “short circuits” to cancel trading if prices volatility is too high. To minimize the systemic risk, the algorithms will have to be examined and authorised by regulation bodies.
Some months ago the Frankfürter Allgemeine’s editor Frank Schirrmacher suggested in an interview for Spanish magazine Consejeros that those mathematicians who were dedicated to develop biological weapons in Cold War times have now been transferred to create their algorithms for financial markets:
“The Game theory by John F. Nash, which became an important strategy weapon during the bipolar and paranoid world before 1989, is based on a mathematical formula starting from the principle that all players search for their own interest and maximum profits. Imagine that applied to the crisis management, imagine mathematical algorithms applied to stock markets which at the same time move at a very high speed. We may remind of US tycoon Warren Buffet referring to financial derivatives bussiness as massive destruction weapons in 2008”.