Automation causing additional risk in the stockmarket…
…the financial community once again asking if its pursuit of profits has led to software agents that are fast yet dumb and out of control.
… examines how Wall Street has gotten to the point where flash failures come with increasing frequency, and how much further traders seem willing to go in pursuit of ever-greater speed.
… quants—the physicists, engineers, and mathematicians-turned-financiers who generate as much as 55 percent of all US stock trading.
…“the race to the bottom,” the cost-is-no-object competition for the absolute theoretical minimum trade time. This variable, called latency, is rapidly approaching the physical limits of the universe set by quantum mechanics and relativity.
… companies would spend $2.2 billion in 2010 on trading infrastructure—the high-speed servers that process trades and the fiber-optic cables that link them in a globe-spanning network.
… investors who make money the newfangled way: a fraction of a cent at a time, multiplied by hundreds of shares, tens of thousands of times a day.
Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”
… transaction times are measured in micro seconds and prices are carried out to six decimal places…
There is so much money to be made that any expenditure on research and infrastructure to shave those microseconds is worth it.
… high-frequency trading servers, which receive data and spit out orders according to programs—algorithms.
Prices are a closely guarded secret in this world, although the consensus estimate among traders is “plenty.”
… you have to trade a lot more stock, a lot faster, to make the same amount of money. It’s no place for a human being.
One reason high-frequency trading works at all is that it takes place much too fast for human beings to get in the way.
No sane human trader would spend their time haggling over a ten-thousandth of a cent, but computers don’t get bored.
And that’s where the really dangerous part begins to set in. It’s not just that humans are less and less involved in trading; it’s that they can’t be involved.
Trading increasingly is an end in itself, operating at a remove from the goods-and-services-producing part of the economy…
… right now high-frequency trading is essentially unregulated.
Even free information, such as corporate earnings reports and government statistics, can be sold if you format it to be machine-readable.
• Image by Lee J Haywood; used under Creative Commons Licence