By Dov Michaeli

Here is a story that has eluded the headline writers of the financial press, but has intriguing social implication for the world of today.

Two Norwegian day traders (people who trade the market with a very short time horizon, usually exiting their trade before the day is over), worked out how a certain computerized system would react to certain trading patterns – allowing them to influence the price of low-volume stocks. The case, involving Timber Hill, a unit of US-based Interactive Brokers, comes amid ­growing scrutiny of automated trading systems after the so-called “flash crash” in May, when a single algorithm triggered a huge plunge in US stocks. Svend Egil Larsen and Peder Veiby had won admiration from many Norwegians for their apparent victory for man over machine.

It also won the admiration of this American, vindicating his belief that when you pit Man against Machine -Man may lose many battles, but will ultimately win the war.

Golem –the father of all computer robots

There is an ancient Jewish story about Rabbi Loew (also called the Maharal) who lived in Prague in the late 16th century. In 1580, a rumor was circulating among the non-Jewish population that the Jews were using the blood of Christian children in their Passover ritual. To ward off the threat of pogroms and expulsion, Rabbi Loew made a giant robot, called a Golem, out of clay and the purified elements of air and fire. But the last ingredient necessary to animate the Golem was the True Name of God, known only to sages of the Kabbalah, who were closest to God. Rabbi Leow was one of those exalted sages, and he endowed his Golem with life by inserting a parchment with God’s True Name in the Golem’s mouth. But then, the story goes, after rampaging and killing the gentiles who were planning to harm the Jews, he got out of control and rampaged against the Jews. He was brought back under control by removing the parchment with God’s True Name from his mouth. Is this the earliest version of what we call today “software”? In any event, he became just a lifeless piece of hardware made of clay, and was stored in the attic of the Alt-Neu synagogue in Prague, where he still resides.

Nice story; it presaged the story of Frankenstein, which originated in the Carpathian mountains of Romania, where the story of the Golem was part of the folklore. In fact, the word “golem” is used in Macedonian and Bulgarian, to mean “large, big”, and in Yiddish Goylem means “idiot, moron”.  But the story also presaged our modern day supercomputers and their monstrous computing capabilities.

The computers that run Wall Street.

Until a few years ago computers did what robots are supposed to do: perform the mundane housekeeping stuff that can be easily automated, like recording transactions, storing trade data, etc. But then the “quants”, the quantitative geniuses with Ph.Ds in math and computer sciences, were hired by the hundreds by brokerage houses like Goldman Sachs, Morgan Stanley, and the big money center banks of Citibank, Morgan Chase, and others. Their task? To find a way to beat the competition to the punch. No sooner said than done: the “quants” devised algorithms that could recognize patterns of trading in specific stocks and in the market as a whole, and execute strategies to take advantage of the insight in microseconds (that is, millionths of a second!). To increase their advantage even further, they co-located those supercomputing monsters in the same buildings as the exchanges – to shave the few nanoseconds (a billionth of a second!) off the travel time of the electrons…

Do you smell a disaster waiting to happen? It did. On May 6, 2010, at 2:45 pm, the Dow Jones Industrial average plunged  998.5 points in a matter of a few minutes, biggest decline in history on an intraday basis. The market then recovered, in a matter of minutes as well. What happened? Not much is known, but what we do know is that one of those Golems executed a pre-programmed gargantuan sell order that should have taken hours to complete, in a matter of 20 minutes. The other Golems sensed within milliseconds that the market is heading down precipitously and executed their own automatic sell orders to protect themselves. The result?  A bone jarring, mind numbing crash the like of which has never been seen before. Mind you, the whole process was self-generated and self-directed by the machines. Humans were not involved; for crucial minutes they were hapless observers.

How is it that we still don’t know in great detail what exactly happened despite a five-month investigation by the SEC, the regulatory agency that brought us Bernie Madoff? This is because those supercomputers do not make their transactions in the regulated exchanges that we mortals do; they use about fifty “dark pools”, totally unregulated exchanges, to perform their black magic. To get a sense of the volume of trades going on under the cover of non-regulation darkness consider this: the 1352 stocks listed on the regulated New York Stock Exchange trade at an average total volume of 1-2 billion shares a day. Compare that with just the top 25 stocks traded by the high frequency computers, trading at an average of 1.73 billion a day. But what is unfair about it, you might ask? Unquestionably they enjoy a huge advantage over the poor slobs who still buy and sell stocks using their pitiful home computers. Just look at the record: since the advent of the automated trading every single year was hugely profitable for them. This would have been statistically improbable if there was a level playing field. The dice are loaded.

The Triumph of Man?

Back to our two Norwegian traders. I cheered when I read their exploit. They outsmarted the algorithm of the supercomputer and beat it at its own game. Wouldn’t you? Wouldn’t any sane human being? Well, things are not quite what they seem to be, and like in the theater of the absurd –you have to suspend disbelief.

A Norwegian court found them guilty of market manipulation!  Wait a minute! They manipulated the market? And those algorithms get off scot free? And since when are algorithms considered “the market”?

On a second thought –how do you sue an algorithm? I suppose you could sue its creator. But he could always claim that he just created the software and bears no responsibility when the algorithm assumes control of its own actions. After all, would you sue Henry Ford for invention of the Model T if it caused horrendous congestions on the Los Angeles freeways? In other words, science and technology are amoral, they are neutral; it is their use that can render them good or evil. Example: nuclear energy can be beneficial (think of nuclear power plants, radiation treatment for cancer, etc) or evil (think of nuclear bombs, ” dirty bombs” to spread radiation sickness, etc.). Complicated.

We live now in an Alice in Wonderland world where corporations, entities that are the creatures of legal definitions and documents, are considered by the Supreme Court to be living and breathing entities (organisms?) when it comes to protection of their free speech under the first amendment. Any attempt to at least narrow this dangerous legal theory was vigorously rebuffed. The result? These Golems are now running out of control and are taking over our political system. Did Thomas Jefferson contemplate giving a bunch of plantations the protection of the first amendment? Or Alexander Hamilton giving the Bank of Philadelphia the right to express its “opinion” on elections in Virginia, using its depositors’ money? I suspect that if our Founding Fathers saw what we did with their brilliant document they would be utterly confounded. The discouraging fact is that such thinking, where the inanimate world is given equal, or even superior weight to human beings, is gaining currency in such moderate, progressive countries as Norway.

What does all that have to do with Medicine? Plenty. The  Courts ruled that corporations (drug companies) can patent human genes. In other words, the “rights” of the corporation take precedence over the rights of the humans who actually own the gene. So if your physician wanted to see if you are BRCA1 or BRCA2 positive (these are genes associated with a high probability of developing breast or ovarian cancers) she can’t legally do it. Your sample has to be sent to a laboratory that was licensed by the patent holder, and they will be happy to perform the assay for a cost that varies from $300-$3000. Any hospital laboratory could have performed this test for less than $50 had your genes belonged to you rather than to the drug company. Mind boggling.

What’s next? It is not too farfetched to expect some legal geniuses argue before the Supremes that computers and their software are the market and that any attempt to curtail the computer trading algorithm infringes on its constitutional right to trade, which is after all a form of speech.

How did my mother say? Oylem Goylem.

Dov Michaeli, MD, PhD
Dov Michaeli, MD, PhD loves to write about the brain and human behavior as well as translate complicated basic science concepts into entertainment for the rest of us. He was a professor at the University of California San Francisco before leaving to enter the world of biotech. He served as the Chief Medical Officer of biotech companies, including Aphton Corporation. He also founded and served as the CEO of Madah Medica, an early stage biotech company developing products to improve post-surgical pain control. He is now retired and enjoys working out, following the stock market, travelling the world, and, of course, writing for TDWI.