Powerful computers can wreak havoc on U.S. stock markets, creating hair-raising volatility and eroding investor confidence in the lightning-fast search for profit.
But far more powerful computers could help save it.
High-speed trading now dominates U.S. stock markets, buying and selling in a fraction of the time that it takes to blink. Computers detecting rapid swings in prices and instantly reacting builds volatility and more trades, generating a sea of chaotic data and a vicious feedback loop that can lead to nightmares far worse than May 2010's infamous "flash crash."
Faster still is "Edison," a supercomputer tended by Lawrence Berkeley Laboratory scientists in a former Wells Fargo Bank building in downtown Oakland, Calif. Edison-like computers could track ultrafast trading across the nation's many markets, detecting precursors to a crash -- and sounding early warnings for regulators seeking to avert a gruesome economic wreck.
It would be like a NASCAR race yellow flag warning drivers to slow down, scientists say.
"If improved monitoring and regulation can build some greater trust in the market, everyone benefits," said David H. Bailey, director of the lab's new Center for Innovative Financial Technology, which is building a bridge that links computational science and financial market communities.
When fully deployed later this year, Edison will perform as many as 2 quadrillion operations a second. Tracking every trade, in real time, on every U.S. stock exchange? No big deal.
"That data size -- we routinely do 10 times that much. Easily. It's a trivial matter," said mr. Bailey, a leading figure in both high-performance scientific computing and computational mathematics.
Not so long ago, life was simpler. U.S. stock markets moved at a human pace, simply matching buyers with sellers. But now many exchanges take place. And more than half of all trading is done by high-speed computer "traders."
Most agree that computer trading is good for the average investor because it's inexpensive. But it also triggers unpredictably large price swings that are breeding distrust in the market.
"Electronic markets ... seem capable of impressively flaky behavior," said Lawrence Berkeley Lab's David Leinweber, a computer scientist, former investment manager and algorithmic trading specialist. "We are lost in the jungle when it comes to our ability to understand ever-faster markets well enough to keep them safe, stable and secure."