Briefing: Computer traders blamed for Wall Street crash

When the Dow Jones stock market index suffered its largest ever single-day drop last week, fingers were soon pointing at the high-frequency traders and the computer programs they rely on. Are computers now too powerful to be allowed in financial markets? Could computer traders bring down Wall Street?

It certainly seemed plausible at 2.30 pm in New York on 6 May. Traders went into a panic as the Dow Jones index, which follows 30 large publicly traded companies plunged an unprecedented 6 per cent in 20 minutes – for no apparent reason.

Such a drop represents billions of dollars being wiped off a company's value, although in this case prices quickly bounced back. The reasons for the plunge remain unclear, but high-frequency traders – who use powerful computer algorithms – are in the frame.

The traders use computers to profit from short-lived fluctuations in markets. An algorithm might, for example, watch for large transactions from institutional investors that could affect a stock's price and make trades before the rest of the market has time to react. That and similar strategies have created a market for high-frequency traders in which transactions amounted to around $8 billion last year. These near-instantaneous trades make some economists nervous. They fear that the algorithms could interact to create a feedback loop of continuous selling, driving market prices off a cliff. Although the cause of last week's volatility is still unclear, it seems that algorithmic trading played a role.