From Bill Buckler, author of The Privateer [2]
It’s "GIGO" Time On Wall Street
“GIGO” means Garbage In - Garbage Out. It is a particularly apt acronym in computer programmer circles. According to the Wikipedia: “It is used primarily to call attention to the fact that computers will unquestioningly process the most nonsensical of input data (‘garbage in’) and produce nonsensical output (‘garbage out’).” Trading desks on Wall Street, in the City of London and all over the global financial system have been happily ignoring GIGO for a very long time now.
Four years ago in 2008, the “computer models” which had made the big investment banks huge piles of money turned around and savaged them as the entire credit system froze up. The programmers who had installed the trading software on the computers of the traders had never seen such a thing so they made no provision for it. The problem then and the problem now is that without the capability of computers and their “models”, most of the methods of modern market trading would simply not be possible. The vast majority of all trading is done via computers. The most popular of these methods, “high frequency trading”, did not get properly started until late 1999, just as the markets were peaking. The most recent surveys show that in the US, high frequency traders represent 2 percent of all financial trading firms but contribute almost 75 percent of market volume. All of this is ENTIRELY dependent on computers.
Here is the conclusion of a US study of computer-generated trading recently concluded: “Financial markets are alive, but a model, however beautiful, is an artifice. ...To confuse the model with the world is to embrace future disaster driven by the belief that humans obey mathematical rules.” The powers that be have been embracing future disaster on this belief in a manner which goes far beyond financial markets. But in that shrunken context, individuals everywhere have already abandoned that belief. Wall Street and its global counterparts have been trying to do that too, but their problem is that they have nothing to replace it with. The “belief” that humans can be managed by obeying arbitrary rules of any kind is the last bastion of our rulers. It is waning on the financial markets, just as it is everywhere else, with results that no computer program can predict. That’s why the “market model” no longer “works”.