Friday, January 21, 2005

"Is Your Stockbroker a Robot?": According to the article, "for the first time in the NYSE's long history, a majority of the market moves may have been dictated by machines, not by human agents." But what does it all mean? The author summarizes:
It all sounds like a recipe for disaster. In theory, sell programs could trigger other sell programs, and cataclysm could ensue. (Program trading was partly blamed for the 1987 stock crash.) But as program trading has risen, the market counterintuitively seems to have grown less volatile. The exchanges have built in mechanisms to stop program trading from moving the market once certain limits are breached. And there's also a degree to which program trades are self-regulating. Every day, there are hundreds of different computer-driven strategies at work, and they frequently work at cross purposes. If IBM breaks through 100, it might simultaneously trigger a sell program at one hedge fund and a buy program at another.

The rise of the machines may undermine the journalists' narratives of the market. But at another level it's somewhat comforting. Program trading creates a highly unpredictable, occasionally unnerving universe in which sudden reversals can crop up out of nowhere, only to be followed by sudden outbursts of optimism. In other words, a market dominated by computerized program trades is a lot like real human life.
(Via Cosmic Log.)