The Fear Index

31 October 2011 | By Robert Thickett

There have already been hundreds of novels, plays and films about the crisis over the past three years.

Most of the current crop seem to focus on the role advanced computer systems and maths played in aggravating an already delicate situation.

As we saw in a recent BBC documentary on the Royal Bank of Scotland, the bank’s bosses repeatedly told analysts, journalists and share holders that it had only minor exposure to US sub-prime.

Actually the reverse was the case and they were either lying or had no idea how debt was being repackaged and sold on, and what the bank’s true exposure was.

It’s this disconnect between the established world of finance and the complicated maths and computer systems that now track, predict and trade that Robert Harris explores in his new novel The Fear Index.

It charts 24 hours in the life of hedge fund owner Alex Hoffman as he slowly realises that the computer system he has developed to trade and make money on the stock market, the VIXAL-4, might be cleverer than he thought.

The plot motors its way through a variety of different genres, from crime to science fiction and horror, all of which make it an engaging and quick read, but Harris also makes a serious point about how we’ve ended up with such a complicated financial market.

He explains that the US had intended in the early 1990s to have its own version of the large hadron collider operated by CERN, the European Organization for Nuclear Research, in Geneva.

But to save $10bn in 1993 the US government pulled the plug. The result of this was to leave an entire generation of US academic physicists out of work.

While a select few managed to get work in Europe at CERN, the majority went to work on Wall Street, where they built complicated derivatives rather than particle accelerators.

And when that went wrong, US Congress had to pay $3.7trillion to bail out the financial system.

As one of the characters in the novel quips, it’s another example of the law of unintended consequences.

The final stages of the novel will be familiar to anyone who enjoys the Terminator films or has seen 2001: A Space Odyssey, with the psychotic artificial intelligence HAL.

The VIXAL-4 system that Hoffman has built in the novel is an equally scary creation.

And while it’s clearly fantasy, last year there was an article about a UK university postgraduate course that had been deluged by students keen to develop their own algorithmic proprietary trading systems and set up their own hedge funds.

When vast sums of money can be made from trading on the market, coming up with algorithms to trade is clearly big business.

Hopefully they won’t be as complicated as The Fear Index’s VIXAL-4, but the book describes the potential nightmare that comes from letting complicated systems that only a small elite understand dominate the market.

And if they are as complicated as the VIXAL-4, I just hope our robot masters of the future show some compassion.

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