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Algorithmic Trading Rapidly Replacing Need For Humans 331

Posted by Soulskill
from the digitizing-greed-and-fear dept.
DMandPenfold writes "Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets. Around one third of share trading in the UK is conducted by computers fulfilling commands based on complex algorithms, said the Foresight panel in a working paper published yesterday. Nevertheless, this proportion is significantly lower than in the U.S., where three-quarters of equity dealing is computer generated. The Foresight panel, led by Dame Clara Furse, the former chief executive of the London Stock Exchange, argued that there are both benefits and severe risks to algorithmic trading. There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."
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Algorithmic Trading Rapidly Replacing Need For Humans

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  • Absolutely (Score:3, Interesting)

    by Anonymous Coward on Friday September 09, 2011 @01:25PM (#37353530)

    As someone who worked at Goldman Sachs, I can completely attest to this; a lot of the software was automated, but what the trading group was always asking for was basically an autopilot system; they wanted to sit back and just let the money roll in. One of them, I remember it distinctly, said that he'd love it if he didn't have to watch all the various windows all the time because he "had better things to do".

    This was the same group of guys who, one of them told me "if I could kill you, not get caught, and make money because if it...I wouldn't think twice".

    Fun times...

  • by Halo1 (136547) <<eb.tnegu.sile> <ta> <ebeam.sanoj>> on Friday September 09, 2011 @01:33PM (#37353634) Homepage

    Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets

    Like making it illegal [slashdot.org] for humans to beat the algorithms?

  • Re:This is bullshit. (Score:5, Interesting)

    by LordNacho (1909280) on Friday September 09, 2011 @01:47PM (#37353856)

    I Googled it. Here's a report about what some researchers think:

    http://www.tradersnarrative.com/what-if-hft-is-actually-good-for-the-market-4723.html [tradersnarrative.com]

    "That public perception may need to be adjusted according to this recent research by finance PhD candidate, Jonathan Brogaard (Kellogg). The paper looks at the effect of HFT on equity markets and through analysing the strategies used by these firms it considers their profitability, impact on market liquidity and volatility.

    There is evidence that high frequency trading contributes to price discovery and liquidity. There is also evidence that it has a minimal impact on volatility and may even reduce it. There is also no evidence that they engage in front-running. HFT demand for liquidity (42.7%) is slightly higher than their supply of liquidity (41.1%) and they provide the inside quote about 65% of the time."

  • Re:This is bullshit. (Score:5, Interesting)

    by dannys42 (61725) on Friday September 09, 2011 @02:17PM (#37354366)

    The problem with studies like that, and much of the analysis of the stock market, is that it's all done on the numbers. The researchers may be absolutely correct in their study. However, what the current state of the stock market does do is encourage the "wrong" state of mind for many businesses. It's my belief that going public ruins more companies than it helps for exactly this reason (this would be a human study not a numbers study). People start making decisions based on what they thing the investors want that quarter. And to me, that's the surest way to kill a business, as you've now taken away from your focus on your customers and your employees. So while HFT may increase liquidity and all that good stuff, it's doing so at the cost of the long term health of the company. (Not all businesses fall into this of course, but it appears to be more common than not).

    I may not be a serious day trader, but as an (albiet modest) investor, I want a company that thinks long term. And it's my understanding the stock market was originally created for investment purposes. What sort of "investment" is it to put money into company for a second or even a day or a week? I actually think the time window for making trades should be more like one a month or even a quarter or maybe twice a year. With a longer period between trades, I understand people may feel uneasy about the commitment, but I think that's exactly what it should mean to "invest." However, if it's a big enough deal to people, then perhaps you could also have a (shorter) window for backing out (with perhaps a small penalty).

  • Re:This is bullshit. (Score:4, Interesting)

    by bluefoxlucid (723572) on Friday September 09, 2011 @02:31PM (#37354602) Journal

    In communism, the government holds reins on the market and dictates activity.

    In free-market capitalism, big money holders find ways to hold reins on the market and dictate activity.

    Communism is arguably better, except that it's really identical aside from trading "vicious, self-serving market leaders" for "brain dead, incompetent market leaders." It turns out putting idiots in charge is just as bad as putting tyrants in charge.

    It is thus sensible that we would occasionally look at a situation, knee jerk "That's Not Fair(TM)," and then calmly and rationally begin to investigate the unfairness to determine if we can make it fair without doing too much damage. Every time we try to regulate something, there is a cost ... but there are already economic costs, like the out-of-control prices of college tuition and books, or the decoupling of rental property rates from rental operating costs (if there is more money in the area, rent prices go up and the poor get pushed out--in other words, it will always be expensive to live decently, and the middle class will likely continue to shrink while the poverty line continues to raise). Fixing any of these things is dangerous; they're already broken, but you can do far worse.

    HFT is one of these things. It has an economic cost I'm not very interested in (I dislike the practice, but not on any specifically well researched basis), but to regulate it away would also have economic costs. You have to determine if those costs are in excess of the social and economic value gained by eliminating HFT before you even begin to regulate it.

Philogyny recapitulates erogeny; erogeny recapitulates philogyny.

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