Automated trading system
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Computers have taken over the majority of trading on Wall Street and are threatening the very nature of the trading profession. Laura French asks whether traditional traders are fighting a losing battle. Throughout most of the 20th century, robot traders would have been a mere figment of the sci-fi film-influenced imagination. But computerised traders have taken it to the next level. Rise of the machines Eric Hunsader from US data firm Nanex believes robot traders fiddle the market, ordering then cancelling trades just before the critical buying moment.
Nanex reported that the case marked the first time two large trading companies have been in a spoofing dispute, which led the CME, on which the exchange was made, to review its regulations. Concern over the dangers of robot traders has led others to probe, including American Attorney General Eric Schneiderman, who is investigating their potential for manipulation. The Dow Jones Industrial Average dropped by nine percent — 1, points — in the space of minutes.
A high-profile probe by the SEC found that computerised traders were behind the decline. According to Nanex, those moves might have been premeditated attempts at manipulation, although some, including the SEC report, refute the idea. Either way the circuit breakers put in place to prevent such shock incidents failed to act — a worrying indicator of their fallibility. Hunsader says HFTs sometimes, somehow, work outside of the five to 10 percent parameters set by programmers.
Those blunders are likely to continue unless systems and regulators improve, according to Hunsader. Major firms are reluctant to implement that transparency, however, for fear other companies could copy their transaction patterns. That seems to be the view of Wall Street trader-turned-Cambridge University neuroscientist John Coates, who explores the risk-taking element of trading and its physiological effect in his book, The Hour Between the Dog and the Wolf.
He writes that the biological response to risk-taking impairs human judgement, causing jumps and crashes in the stock market. Computers should theoretically be able to stabilise that, evading the problems human activity entails — but incidents like the Flash Crash suggest the contrary. Insufficient replacements What robot traders do evade are the human-specific elements that have for so long been fundamental — and beneficial — to trading.
As human trader control wanes and IT personnel monitoring the algorithms take overso too does conscious risk-taking, decision-making and intuition, which computers simply cannot mimic. That lack of thinking capacity can add to the dangers; it was an absence of decision-making ability that saw the robots all suddenly withdraw from the Flash Crash in reaction against the plungesin turn sparking the stock spikes.
And their inability to process and react to changes which might affect share prices in the way a human could means they can instigate significant losses. Eradicating humans also means reducing the diversity of traders. If one major HFT producer such as Virtu were to monopolise the market, then just one system would be responsible for all trading.
According to Husander this too, would be detrimental to trading. A return to human-only trading is hardly viable given the difference in profits robots can generate in comparison to human traders; the fastest human cognitive processing takes around to milliseconds according to Coates, while an HFT can process at around a millionth of a second.
Husander believes the future of trading lies in combining human intuition with computer processing capacity, via an almost cyborg-like interface that would allow humans to input information at a rapid rate. Regardless of where trading goes from here, robots have and will continue to transform its nature by replacing human thought. Many are concerned a new breed of trader robots are taking over roles traditionally taken by humans. Previous article Apple Pay to propel mobile money into the mainstream.
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