The Rise of the Machines

By The Banker | Blog Posts
1 Aug 2012
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SkyNet made its mark on US stocks again this morning at the market open, as about a dozen companies saw their shares jump or plummet wildly in the opening minutes on the New York Stock Exchange, on exactly zero news, most likely due to computer-driven orders, and with no human input.

Outside of the specialized world of stock trading, many retail investors probably do not know that an estimated 80% of US stock trading volume is based on computer-programmed buy and sell orders.  In other words, 4 out of every 5 dollars flowing through stock exchanges has no human decision-maker behind it.  Stocks trade only a programmed response to preset algorithms.  At this point, SkyNet completely dominates stocks.

How did this come about?  High Frequency Trading firms (HFTs) seek to profit from predictable responses of some shares to the movement of other shares and market inputs, but HFT computers need to execute trading orders in fractions of seconds in order to benefit from their ability to see the immediate predictable future.  Since humans cannot act fast enough, the machines have been programmed to trade in their place.

When things in stocks get really screwy, as they did this morning, and as they did most dramatically during the 2010 Flash Crash, we’re reminded that the humans are no longer in charge.

Lobbyists for the HFT firms have already come back from the future and are visiting the offices of our Congressman one by one to eliminate any Sarah or John Conners that seek to regulate HFT’s role in US stock markets. Post read (2880) times.

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8 Comments

  1. Yanna says:

    Dear Banker,
    Is anything practical (as opposed to congressional hot air) being done to prevent/regulate this type of trading?

    • The Banker says:

      Yanna, thanks for your question. In some ways – for example the Knight Trading debacle – its self-regulating, since the company essentially gotten taken out by its own misfiring computer. They got bought up today by a consortium of Wall Street firms. In the larger sense, the HFT firms are WAY ahead of any regulatory/watchdog group. I had a conversation 2-3 years ago with a buddy at one of the larger firms, and he explained that they essentially kept their full computing power under wraps, unwilling to turn it all the way up to full power since they would dominate trading even more than they already do. He was also part of a trade group making the rounds with Congress, making sure Congress stays compliant.
      I would love to do an interview with him or another buddy in the industry, as its role in the stock markets is MUCH larger than people even realize. Not sure I can get them to go on the record though.
      There’s an arms race of sorts going on with the HFTs, in which they get faster and faster ever year. In that type of rapidly innovating market, the regulators will be left in the dust.
      Only a massive blowup (see the Flash Crash of 2010) will push regulators to get in front of this one before its too late.

    • The Banker says:

      And just to more directly answer your question: No, nothing practical is being done.

  2. JIM says:

    love the John Connor reference at the end. very bill simmons

  3. David says:

    Ok then– so the obvious question is, “How *do* we blow up sky net?” If it’s clear that trading has become mechanized to the detriment of the individual human investor, how do we change that system so the benefit flows to as many people as possible?

  4. The Banker says:

    OK, more serious answer: Skynet can only be fought through people educating themselves about finance. Hence B$A

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