Wednesday, August 22, 2012

Hands-free trading

Back in the day, a trader on the floor of the New York Stock Exchange could lose a bundle if he/she made a bad decision. Maybe go broke.

Now computers can do that for them.

Knight Capital Group lost $440 million recently when they uploaded a program containing errors to their servers as part of a software update.

Computer programs now account for much of the trading on the world's markets. They make buy and sell decisions in milliseconds based on market activity in a stock, a currency, or a commodity.

Of course, with so much of this going on, these algorithms are responding to trades made by other algorithms. Many fear that, in the absence of human intervention, extreme volatility could develop, producing a sudden market plunge.

In fact, we had a taste of this in the "flash crash" of 2010, in which the Dow Jones Industrial Average plunged more than 1000 points within minutes.

If your pension plan is invested in these markets, and it probably is, you could be forgiven for worrying just a little.

1 comment:

  1. Oh well. I wasn't planning to sleep tonight anyway.