This crash was caused by high-frequency trading aka HFT, a type of algorithmic trading where computers automatically buy and sell stocks at very high speeds. High-frequency trading is controversial because it can cause sudden and dramatic fluctuations in stock prices.
The development of high-frequency trading began in the 1960s and 1970s, when scientists and gamblers began to develop algorithms that could be used to predict the outcome of roulette games and blackjack. In the 1980s, these algorithms were adapted for use in the stock market.
In that crash, investors panicked and began selling their shares en masse. This caused the price of stocks to plummet. In the aftermath of the crash, many people believed that the stock market was inherently unpredictable. However, some mathematicians and scientists, such as DNE Farmer, disagreed. They believed that it was possible to develop algorithms that could predict stock prices.
Farmer and others founded companies that used computers to trade stocks. These companies were able to make profits by exploiting patterns in stock prices. However, it took them several years to develop algorithms that worked consistently.
One problem is that high-frequency trading can make it difficult for ordinary investors to compete. Because high-frequency traders can react to changes in stock prices so quickly, they are able to buy and sell stocks before other investors can even react. This can give high-frequency traders an unfair advantage.
Another problem is that high-frequency trading can make the stock market more
Because high-frequency traders are constantly buying and selling stocks, they can cause stock prices to fluctuate rapidly. This volatility can make it difficult for investors to make long-term investments.
Finally the video argues that high-frequency trading has led to a culture of greed and corruption on Wall Street. High-frequency traders are often rewarded for making large profits, even if those profits come at the expense of other investors. This can create an incentive for high-frequency traders to engage in unethical behavior.