I just got into Sweden for a conference, and I am immediately struck by how efficient the place is.  My room, which might be described as a small American room, had two additional roll-away twin sides beds in it.  When I asked the front desk what they were, the one person on duty (that is the standard shift size) explained that the room is so big that it usually fits three. The hotel had some extra space available, so they gave me a free upgrade.

There is also no storage space.  No dressers, just a one-foot-wide desk-like surface that goes the length of one wall, and a space wide enough for shirts with six inches of depth, a bar, and four hangers.

Most of the lights in the hotel are motion-sensitive; they waste no power.  In order to turn on the lights in my room, I have to insert my key-card.  If I want to get back in the room, I need to take my key-card out — making it impossible for me to accidentally leave the lights on.

Assuming you made your reservation right, sign-in is with a kiosk, not a person.

All of these efficiencies  make it possible for the company to have more guests per employee, to compete on price.

In a sense, that is a wonderful thing. The Swedish people are hard-working and view efficiency as a virtue.  The waste-basket is tiny because they don’t waste — these are the people that invented IKEA.

The downside is that this drive for efficiency destroys jobs.

That’s not new either; the luddite riots, when the “machines are taking our jobs away”, actually happened in 1812.

Unlike 1812, though, I do see some  forces at work that are a little troubling.

The IT Jobs Story

Companies get more efficient over time.  The mom and pop video store fell to blockbuster an the big-box retailers.  In April 2010, Blockbuster filed for backruptcy as it fell to Netflix.  Walden books, the store I spent half my youth in, recently disappeared, and was followed by its parent company, Borders, which filed for bankruptcy in February of 2011.  Amazon, which was widely considered the victor, might have followed, if they had not chosen to create the Kindle.

Amazon didn’t suffer for the Kindle, but traditional publishers certainly did.

In addition to efficiencies, employers have wised up  about redundancies.  When two companies merge, they can not only cross-sell, but generally end up with HR, legal, and IT departments that are smaller than the combined size of the original departments — saving money by eliminating real estate, consolidating data centers, and, yes, layoffs.

All that would be fine.  Efficiency is good.  Employees that don’t have to be on the assembly line can go do other valuable work for the company.

Even if you lay them off, the world still has the same goods and services as it did before – and now it has a surplus of time.  At the very least, the now-laid-off former employee should be able to go create a tech support company, or do yard work, or clean houses, or do laundry, or … something, right?  Each of those companies can make life just a little easier for other people in society.

But there is a problem.

The political and social climate does not favor small business.

There are facts to support this; a recent poll shows that 55% of small business owners would not start again today in this current business climate.

But we don’t need stats to prove that. I know the reactions of my friends and neighbors when I went independent, and I can drive the streets and see the pain of small business and victory of chains and franchises.

There’s More to Talk About

The opening sequence of Issac Asmov’s “The Caves of Steel” is scene of open revolt.  There is high unemployment; robots have just become automated enough to fit, size, and sell shoes.

When I checked in to the hotel today, at the Kiosk, after getting tickets from a kiosk, and riding a train without ever seeing a human, I have to worry, a bit, about what the singularity might really be.

It might not require a computer to become self-aware and tell us all what to do.  Instead, it might be a more graduatal separation of a producing class, a service class, and the folks who don’t fit in, Sadly Out of Luck (SOL).

But that’s a horrible, incomplete picture drawn on limited information.

Right now, I see two real choices:  Find ways to stay relevant as companies continue to merge and change, or get serious about that small business thing.

Over the next few months, I intend to cover both on this blog.

For tomorrow, though, I’m going to enjoy Sweden.  If you’d like me to blog some pictures, just ask.

We’ll come back to our series on the Independent IT Life in the next post, but first … an interlude.

A few weeks ago I introduced the idea of a Singularity Signal – a sort of “canary in a coal mine”, indicating that Artificial Intelligence was getting too powerful — that could happen well before computers become self-aware.

In fact, I’d like to continue that premise into today’s post — the idea that computers do not need to be self-aware in order to act like they are and, in effect, to force humans to conditions that would not individually agree on.

All you have to do is to get computers to do work for human beings, programmatically, in multiple systems that are interlocked.

Like, I dunno, the world’s financial markets, maybe.

I will explain.

It Has Happened Already

On May 6th, 2011, the New York Stock Exchange opened to a minor sell-off, which became a panicked, major sell-off about 2:41PM.  (There’s video!) Over the next ten minuts the Dow Jones industrial average lost one thousand points, about nine percent of it’s total value.  After those panicked moments subsided, the market rebounded, regaining the minor losses, and ending the day down 998 points from the opening bell.

Those ten minutes were the second largest swing for an entire day in the history of Dow Jones. That is to say, only one swing was larger, and it took a whole day, not ten minutes.

The thing was, nobody could explain what kicked off the sale, or why it happened so suddenly.

Oh, we’ve tried; the Securities and Exchange Commission funded a full report, that took six months to issue.  It is available to the public — you can go ahead and read it.   In a nutshell:  Automated trades did it.

How It Works

As an investor, to hedge my bet, I may place a “Trailing Stop” order, to sell my shares if the reach a certain low threshold.   Individually, this sounds like a risk mitigation strategy — I get out if the going gets tough.

But what if everybody else has a trailing stop set?

What you’d see is a race to the bottom.

I’ll let the SEC tell the story:

At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 EMini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.  Generally, a customer has a number of alternatives as to how to execute a large trade. First, a customer may choose to engage an intermediary, who would, in turn, execute a block trade or manage the position. Second, a customer may choose to manually enter orders into the market. Third, a customer can execute a trade via an automated execution algorithm, which can meet the customer’s needs by taking price, time or volume into consideration. Effectively, a customer must make a choice a s to how much human judgment is involved while executing a trade.

This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm” ) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.

The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010). Only two single-day sell programs of equal or larger size – one of which was by the same large fundamental trader – were executed in the E-Mini in the 12 months prior to May 6.

When executing the previous sell program, this large fundamental trader utilized a combination of manual trading entered over the course of a day and several automated execution algorithms which took into account price, time, and volume.  On that occasion it took more than 5 hours for this large trader to execute the first 75,000 contracts of a large sell program.

However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes.

That’s right.  Someone picked the computer to do the sell, and it did exactly what it was told, and everyone’s trailing stop kicked in … and the rest is history.  (The good news, the mini-rally, is likely because the “leading buy” orders kicked in!)

The official story is that one large sell order sunk the ship, it’s more that that.

It’s more than the trailing stops, too.  Watch the Network News Video again:  These people have no idea what is going on. None.

The ticker itself is controlled by a computer.

Now a human, a thinking human, watching the inputs to the ticker, could see that something was going wrong, and stop the system – but a computer would simply execute trades as instructed, showing that demand suddenly dropped, supply went up, and it was time to adjust prices to reach equilibrium.

What about the circuit breakers?

After the last big crashed caused by integrated computer system (On Oct 19, 1987), the SEC and the Stock Exchange put in place “Circruit Breakers”, automatic systems designed to halt all trading in the event of massive swings in the Market.

Why didn’t they work?

The flash crash happened to quickly, at the wrong time of the day.  It didn’t trigger any of them.  As Chris Sheridan explains on his blog, the breakers were turned off at 2:30PM.

The sell order came at 2:31.

What can we learn here?

Obviously (or perhaps not), automated systems, programmed by different people who didn’t check with each other, trying to trade automatically, could have unintended consequences.

More importantly, they will have vulnerabilities.

Sure, it sounds like a sad story – every player, from the institution trying to sell the options to the poor suckers just trying to “get out” when the market crashed — all those people lost money.

But every transaction has two sides; for each loser, someone else is a winner.

Now I’m not saying this was done with nefarious intent, nor that there was some wide-reaching conspiracy.  There does not have to be one for tragedy to occur.

But, more importantly, there was opportunity. Weakness.  Combinations people did not expect.

As we continue to automate the systems that drive our lives, unless we are very careful, there is going to be more of this, not less.

We don’t need a singularity to wake up one morning, victim to an automated process that takes us to a place we do not want to go.

The Fix

Is to be watchful, to be vigilant, to make our own decisions, and yes, to be very, very careful what you automate, and what decisions you allow systems to make.

You don’t need a time-travelling Arnold and a self-aware skynet; all it takes is one little bug in a piece of software that controls, say, a nuclear weapon.

Hey, everybody, WarGames is available free on YouTube.

Cool.

I think?