Algorithmic trading to replace humans in the stock market

The UK Government’s Foresight panel, led by Dame Clara Furse, has released a working paper that points out that algorithmic trading, or high frequency trading, will soon replace human decision making when it comes to the stock markets. Many countries have already begun replacing humans with one third of the UK trading going to computers and three-quarters of trading in the United States being computer generated.

The Foresight panel warns that this transition to algorithmic trading has its benefits and risks. They have found instances where computer trading can increase volatility in the market and cause massive damage. One example is what is known as self-reinforcing feedback loops. In this case, small changes such as data delays, loop back on themselves and create a bigger change. Normalization of deviance can also occur where risky events are seen as normal until the inevitable crash of the market occurs.

Some benefits the panel sees are an improvement in liquidity, lower costs of transactions and greater market efficiency.
[link to www.physorg.com]