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ROBOTRADING: A DEBATE THAT IS NEEDED, AND SOME SPECULATIONS: PART ONE

August 7, 2012 By Joseph P. Farrell

Over the past few weeks I have been blogging and suggesting in videos (particularly in the members' area here), that we need to have a deeply rooted cultural discussion on some of the core "memes" informing our society and civilization, and among those memes, I have been suggesting in various blogs and books, is money, who it represents, and what it represents.

Concomitant with this discussion, I believe we must have a discussion on our markets, and on the desirability and necessity of computer-driven algorithmic trading, a discussion rendered all the more urgent, I believe, by the recent financial crisis, as well as by events such as this:

Latest Market Glitch Shows 'Trading Out of Control'

Let's look at those opening statements and their implications carefully, before beginning to speculate on the nature of the discussion that might be had about them:

"Wednesday morning's stock snafu had a familiar ring to it — mysterious volume in trades that simply could not have been made by a human comes surging out of nowhere, causing brief but acute market mayhem.

 

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"By now, many players on trading floors have gotten used to the disruptions that can come from the highly automated new world of high-frequency trading.

"But that doesn't mean they like it."'This algorithmic trading is kind of out of control,' Phil Silverman, managing partner at Kingsview Capital, said as officials at the New York Stock Exchange tried to make sense of what happened. 'It seriously hurts investor confidence.'"

We can readily understand, from the point of view of brokers or bankers, why such algorithmic trading would be beneficial, for money is allowed to work at speeds not dependent upon human communications. In short, such trading effectively allows the expansion of the money supply without, so to speak, having to expand the money supply.

But the article touches on the inherent problem as well: such trades are only as good as the programming int the computers making the trades, and in such instances, the algorithm can trigger incomprehensible moves that are not reflective of market reality, and in the final analysis, markets are very human things, and unrealistic reflections of market conditions can thus inhibit, rather then encourage, genuinely human investments.

The questions that would seem to be a necessary part of the discussion that isnot occurring here would thus seem to be:

  1. Should such trading be allowed at all, and if so, should it be regulated or not?
  2. If unregulated, and if a "glitch" in the programming causes unrealistic rises or falls in certain segments of a market, with catastrophic results for human society at large, are such trades indeed legitimate, or should they be subject to nullification?
  3. More importantly, it is conceivable that the broker, in the standard sense, will eventually (if indeed, he has not already become) obsolete, a mere enterer of orders in a program. Should such a fully automated market be encouraged or allowed? and if not, why not?
  4. What standards, if any, are in place for the design, and designers, of such programs? Should such private and proprietary programs be public knowledge, or under what circumstances should such proprietary programs become subject to public scrutiny?

And so on. The last question really highlights the nature of the problem, for trading programs are proprietary information. But when that prioprietary information has an effect that could conceivably spill over with beneficial or catastrophic results for human society, should they then remain so?

These are discussions and types of questions that, by and large, were shelved and tabled during the era that computers and electronics increasingly took over market trading operations, and with the recent  financial meltdown, they are, in my opinion increasingly necessary to public discussion, and should no longer be confined to the conference rooms and offices of corporations of agencies like the SEC.

But there are other, murkier possibilities about which we must also speculate, but those  must wait for tomorrow...

See you on the flip side...