High speed trading systems were not the cause of the 2008 economic crash, according to the results of a two-year US government investigation .
“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” said a leaked copy of the report’s conclusions, seen by the New York Times. The investigations instead blame incompetence, aggressive risk taking and a total failure of political oversight.
The report, by the high-level Financial Crisis Inquiry Commission that was established by President Obama in May 2009, is due to be published this afternoon.
Algorithmic trading relies on advanced computer calculations, often running on thousands of lines of code. The traders, usually hedge funds, use the systems to buy and sell shares in huge volumes according to market fluctuations and other factors.
Algo trading has become the focus of strong dislike among many of those hurt badly by the financial crisis. Its tendency to accentuate market swings - by selling off falling shares in huge numbers and buying up rising stocks - has led to it being blamed for having a role in the crash. Some of the greatest criticism is around its removal of much of the human element during trading.
Stock exchanges around the world are moving fast to improve their trading speeds in order to cope with algorithmic trading. In December the London Stock Exchange began expanding capacity on its record-breaking 126 microsecond latency Linux matching engine, in order to manage the demand. But rivals have promised quicker speeds and better capacity.
In the leaked conclusions, the Financial Crisis Inquiry Commission appears to largely exonerate the systems themselves, instead blaming economic, political and banking mismanagement. Heavy risk-taking and poor regulation had played a key role, it said. This leaves open the possibility that while the existence of the systems is not blamed, their prevalence within trading and the ways in which they are used may come under fire in the full report.
“The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble,” said the report.
But while algorithmic systems were not to blame, the complexity of financial products – with many finance staff admitting they did not understand the products or the risks – played a key role, it said. Decisions not to regulate some derivatives during Bill Clinton’s presidency in the 1990s were a “key turning point in the march toward the financial crisis”.
There are also reports that the study concludes several banks or trading firms broke the law on the run up to the crash.
The full 576 page investigation, out this afternoon, was the product of extensive research and interviews with over seven hundred witnesses. But only six of the 10 commission members, all of them Democrats, have backed the final report.