In two very different industries — the news media and the financial sector — once unfathomable technology is feeding intense competition in ways that have prompted serious soul searching and some very troubling mistakes.
For the world’s financial markets, questions are being asked about high-frequency trading (HFT) where complex algorithms analyze markets and execute orders at incredibly quick speeds, often competing over milliseconds.
For journalism, there is no comparable term — though “high-frequency journalism” might be appropriate. Tools like Twitter have removed built-in, age-old safeguards (notably, time) that many reporters used to double-check information, amping up competition and lowering the bar for verification before publication.
This summer could be a case study in what can now go wrong in both industries.
- For HFT, there was Knight Capital’s astounding loss of $440 million in 45 minutes, which itself followed 2010’s notorious ‘flash crash’, among other incidents.
- For journalism, there was incorrect reporting following the Supreme Court’s ruling on President Obama’s landmark healthcare legislation, which, of course followed inaccurate reports of celebrity death.
And, of course, both industries struggle with a sort of “echo effect” — where a high degree of interconnectedness makes mistakes propagate faster than ever before.
With so much at stake, are the two industries, essentially, engaging in competition for competition’s sake, and dismissing the public good that is supposed to be part of the bargain?
Incentivizing speed
Wired notes that “Wall Street used to bet on companies that build things. Now it just bets on technologies that make faster and faster trades.”
Trading increasingly is an end in itself, operating at a remove from the goods-and-services-producing part of the economy and taking a growing share of GDP — twice what it did a century ago, when Wall Street was financing the enormous industrial expansion of the economy.
New Republic blogger Amy Sullivan made a similar point about the intense competition after the Supreme Court’s June 28 ruling.
Because if this is just about bragging rights, it needs to stop. … because the race to be first is no longer just a feature of news coverage but often the main factor driving it.
In both debates, defenders of the new orders take predictable stances. Progress is good, and technology saves money through efficiencies and by cutting out the need for intermediaries. In the case of journalism, that has meant traditional reporters and editors and in the case of the financial markets, floor traders.
“By eliminating the friction created by working through intermediaries, the net costs of trading have fallen dramatically — savings that benefit society as a whole,” John Lowrey, global head of electronic products and direct market services at commodities broker Marex Spectron, wrote in Financial Times last month.
The defenses also seem to come down to an unyielding belief in competition. One Canadian journalist last year wrote that HFT proponents believe it gives “Adam Smith’s invisible hand a bionic upgrade by making it better, stronger and faster.”
Meanwhile, Ad Week asked journalists who “have made a name for being fast and accurate” about the competition in the wake of the Supreme Court snafu. The magazine noted that “relentless news landscape of micro scoops can swallow up even the most reputable news organizations and journalists.”
One unidentified wire service editor probably said it most succinctly. “If I’m slow, I’m not doing my job.” And Business Insider Deputy Editor Joseph Weisenthal tweeted the following, comparing modern reporting to a classic arcade game:
Is a debate really happening about whether speed matters? NEWFLASH: News is a game of Galaga. You just effin’ keep blasting fast all day.
— Joseph Weisenthal (@TheStalwart) July 9, 2012
Now, if journalists think they’re under the gun, they might take solace that they’re not on Wall Street. A new Transatlantic cable will transmit financial information across the Atlantic 5 milliseconds faster than current methods. A report from Finance Watch summed up the gain by noting that, “it takes the human eye 350 milliseconds to blink.”
The echo effect
Even if the speed measurements differ, there is an echo problem in both environments. Finance Watch noted that HFT created greater interconnectedness, which “could amplify and ‘facilitate’ the contagion effect of shocks across markets.” Commodity Futures Trading Commissioner Bart Chilton made a similar point, telling Barron’s that the 2010 crash “began in the futures market and quickly leapt over to the securities market.”
This might sound familiar in modern media, where an errant bit of news can be repeated by other outlets, bloggers or anyone on Twitter — which despite widespread use has resisted calls for a correction function. Even if the original outlet corrects the mistake, there’s no way to ensure that the “secondary” reports were corrected. Call it the RT problem.
Tom Goldstein, publisher of SCOTUSblog, aptly noted how quickly an incorrect report metastasized within CNN on the morning of the Supreme Court decision, showing another angle of interconnectedness:
CNN had also converted itself into an integrated circuit in which its electronic media teams were tied directly into the broadcast operation. But not anticipating the possibility of an error or confusion, its first Web, electronic, and Twitter reports did not hedge.
The Supreme Court reporting gaffes were compared with the inaccurate headlines from an earlier era declaring, “Dewey beats Truman”, but UPI noted a key distinction:
[W]hat’s different in 2012 than it was in 1948 is the pressure on news organizations to get breaking news out first, and faster than everyone else. At its peak, at 10:17 a.m., more than 13,000 tweets about the Supreme Court decision per minute were flying, and many of them were simply wrong.
Interestingly, HFT’s recent time under the microscope probably isn’t due solely to high-profile meltdowns. Proponents for years pointed to HFT’s ability to lower costs to invest. But that trend is reversing itself. Obviously, it’s very difficult to track anything similar in journalism — though maybe someone is doing the research — so it’s harder to quantify the loss (or gain) provided by a high-frequency method.
Is regulation a solution?
There’s another important difference. Those in the financial industry might flinch at increased regulation, but even some HFT fans advocate the use of “circuit breakers,” which Securities and Exchange Commission Chairman Mary Schapiro said helped prevent the Knight Capital fiasco from spreading in a way similar to the 2010 “flash crash.”
Some question whether circuit breakers are enough, but they’re more than the news media will have (or, really, would want). Federal regulation is anathema to journalists and runs counter to the First Amendment. That means it’s difficult to systematically cut down on problems like the errant Supreme Court reporting — other than best efforts to strike a balance between being first and being right.
Following inaccurate reporting that U.S. Rep. Gabrielle Giffords had died last year, Bill Keller, executive editor of the New York Times, told his own publication that “the tension between speed and accuracy is ‘real but exaggerated.’ ” In that story, Associated Press Executive Editor Kathleen Carroll said, “We have to be able to do both.”
Billions of dollars, maybe more, are on the line with HFT. For the media, the stakes are less concrete, and more about reputations and trustworthiness. It’s debatable which camp is more self-aware — the media has predictably done a fair bit of navel-gazing on the matter. Last month, one of the early architects of HFT, Thomas Peterffy, reportedly told NPR that he’s in favor of more regulation.
“Whether you can shave off three milliseconds in the execution of an order has absolutely no social value,” he said, before comparing the current climate with the Cold War arms race. “It’s a situation where I do not quite see how this will resolve itself … to the benefit of the marketplace. It’s a quandary.”
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