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Gillian Tett of the Financial Times offers a quick overview of the stampeding and herding effect of algorithmic trading that has contributed to the violent volatility of the past few weeks. The problem with computer driven high frequency trading, which apparently represents half of American exchange market activity, is that it operates with the help of rule based systems that take as their data feed the very arena in which it is active. The question, "what does it mean what I am seeing that I should do what about", takes place in a continuous spectrum and gets executed at blinding speeds that no human consciousness can handle. Furthermore, these algo programs are not just operating in a closed system where the trading activity is the only data that gets crunched and is vulnerable to circular feedback loops. They are also parsing all the story eruptions, trends and inflections available through digital media, computing their implications for market trends, and, trying to out-second-guess all the algo competition simultaneously doing the same thing. This is what is behind the Reflexivity Theory of George Soros. Human beings that seek to compete in this arena might as well just offer themselves up to fate which, oddly, is exactly what Chinese gamblers do in Macau casinos with "baccarat punto blanco, virtually the only card game played in commercial casinos that involves no skill or intelligence whatsoever" (FT July 19, 2015 - Gamblers on Chinese stocks abandon their fortune to fate). By the way, that article by Lawrence Osborne is a must read!
