Rise of the Machines: the weird world of high frequency traders

September 30, 2011

     By Duncan Green     

Robin Hood Tax to calm them down: “Welcome to the future. Machines, trading hundreds or even thousands of times a second, now dominate stock trading on both sides of Rise of the machinesthe Atlantic. They buy and sell according to pre-programmed algorithms that range from simple ‘if this happens, then sell’ commands to more sinister programs that attempt to deceive other machines for their own benefit. Other malevolent algorithms flood exchange servers with information, slowing down their systems to ensure that they get their trade in before others can. Meanwhile ‘The Disruptor’ algorithm manipulates markets to disadvantage the regular traders who don’t use high frequency technology. This isn’t science fiction: this is how markets operate now. On today’s stock exchanges speed is everything, and the human mind cannot compete with modern computing; nor can it control it. Expert opinion suggests that the tangled web of automated trades and feedback loops that now dominates share trading is far from stable. And experience bears this out. Every so often several algorithms unite in a spiral of selling (or buying), throwing stock prices into chaos: witness the flash crash of May 2010. This is simply the most devastating example yet of an increasingly regular phenomenon: The Financial Times found evidence of algorithms running amok at least three times in a six month period in 2010; and the financial press regularly report the use of malevolent algorithms which damage the market for short-term gain. Computer driven trading is turning the stock market into a 21st Century Wild West where hold-ups occur at lightning speed, and the regulatory sheriffs have only just woken up to the new bandits in town.” The title? Financial Crisis 2: Rise of the Machines (hence the pic). Maybe Robin Hood and Schwarzenegger now need to join forces. More in a similar vein from John Plender in the FT.]]>