Machine Mania in the Marketplace: How Computers Came to Own the World
Machine Mania in the Marketplace: How Computers Came to Own the World by David Haggith – The Great Recession
With 60% of stocks now being traded by bots that fake each other out in order to create buying opportunities, stock exchanges have lost their connection to the reason markets are created in the first place. The exchanges no longer exist as places for people to buy and sell ownership in a corporation. They exist simply as the neural junctions of a conglomerated machine that plays tricks on itself, and your sole goal is no longer to invest, but to put money in the slot machine that is the quickest trickster.
Many of the people who think of themselves as investors see this pretend investing as being almost risk free now that computers and central banks are running the racket. They put their money in the machines, and machines follow the central banks’ lead, purring along at historically low levels of market volatility as the machines run their automated tasks. A minority of market experts see a market that is building cataclysmic risks as it accumulates fake pricing that has nothing to do with intrinsic value and as the component machines keep getting reprogrammed to do a better, faster job of faking out the other machines.
[Brad] Katsuyama, whose firm and company were made famous by Michael Lewis’s 2014 book, Flash Boys: A Wall Street Revolt, says computers running complex software conducting trades at lightening speeds [are] a “dangerous” threat to the stability of the market, juicing volumes and sparking so-called flash crashes, where assets swing rapidly in value in a matter of seconds. “I think the biggest risk in the market is that 50-, 60-plus percent of the volume is being executed by computer programs who have no idea what companies actually do. They’re just reacting to data. And I think it’s dangerous.” (MarketWatch)
Katsuyama, whose company is starting its own stock exchange to try to combat the machines, blames rare bouts of volatility (flash crashes) on the computer algorithms that now dominate market trading. For example, when Amazon lost $40 per share in four seconds on June 9th this year and then immediately recovered, Katsuyama says you can be certain that didn’t have anything to do with a change in Amazon’s intrinsic value nor with any fundamental economic changes in this world. Some algorithm somewhere jogged a price switch and caused other algos to sing in harmony, flash-crashing Amazon’s stock and triggering a general decline in high-tech stocks. A computer glitch? Or arcane trickery by which the brainiest bot at that particular nanosecond managed to trick all the other bots in order to create a dip and then buy the dip and make billions?