Stop Blaming Computer Programs for Steep Drops in the Stock Market
— October 29, 2018
By Vasant Dhar
In my experience, we should be more worried about the impacts associated with the proliferation of all kinds of new products that provide specific risk exposure to large numbers of investors, but with limited real liquidity. When sentiment shifts and everyone — whether humans or machines —– want to head for the exits through a narrow opening, the result can be these high spikes in volatility.
Machine-based trading has certainly been increasing steadily over the years, with high-frequency trading now accounting for the majority of trading volume, which itself has nearly doubled over the last decade. Critics of machine-based trading assert that it “causes” severe market moves through a cascading effect of algorithms reacting to each other very rapidly.
Read the full MarketWatch article.
Vasant Dhar is a Professor of Information Systems.