Weekend Economists Clean Out Davy Jones' Locker, March 2-4, 2012

[Demeter]

14. ART CASHIN: We May Have Just Witnessed The Presence Of Artificial Intelligence In The Stock Market

YVES SMITH REMARKS: If this is how Skynet awakens, I’m not impressed.

MAYBE NOT, BUT I'D BE TERRIFIED...

http://www.businessinsider.com/art-cashin-artificial-intelligence-stock-market-2012-3?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Business%20Insider%20Select&utm_campaign=BI%20Select%20Recurring%202012-03-01

Wednesday morning, there was a violent sell-off in stocks that seemed to start exactly at 10:00 AM. This had some New York Stock Exchange floor traders scratching their heads.

Art Cashin, UBS Financial Services' director of floor operations, caught some of the trader chatter and reported it in this morning's Cashin's Comments.

It seems that the supernatural speed of the sell-off had traders thinking two words: artificial intelligence.

Here's an excerpt from this morning's Comments:

Algo My Way By Myself Or Open The Pod Doors, HAL - As noted, the instantaneous nature of the selloff around 10:00 raised lots of questions. First of all, Mr. B does not usually mention QE3. He might vaguely allude to further easing and other such code phrases. Further, if it was a quick review of the prepared remarks by thousands of traders, how could the reaction be so instantaneous and uniform?

Those questions prompted an intriguing hypothesis that began circulating in early afternoon. The hypothesis postulated that the speech had been instantly parsed by a computer using artificial intelligence.

Recall that for several months now the Fed has been stressing its “dual mandate”. It stressed that it couldn’t be tied down to worrying about inflation and a firm dollar with the economy still staggering. The very weak labor market meant that they had to keep stimulating under its charge in the “dual mandate”.

Now, if you pick up your copy of Bernanke’s prepared statement, please read the first four paragraphs. Note that paragraph three begins:

We have seen some positive developments in the labor market. Private payroll employment has increased by 165,000 jobs per month on average since the middle of last year, and nearly 260,000 new private-sector jobs were added in January. The job gains in recent months have been relatively widespread across industries….

Then paragraph four starts out:

The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend….

The jobs portion of the dual mandate looked suddenly less compelling. You wouldn’t need much artificial intelligence to see that quickly and clearly.

So was the selloff started by someone’s version of HAL 9000? We don’t know for sure. There are said to be such experiments on trading desks at hedge funds and elsewhere. And, it certainly fits the action to a tee. We’ll check around the watering holes.