I recently came across the blog post Million-Dollar Traders Keep Getting Replaced By Machines and immediately got concerned. As the title suggests, it talks about how human traders are being replaced by algos doing their jobs.
Now don’t get me wrong. I’m all for increased efficiency and cost savings and all that, but some caution needs to be taken here. It’s one thing to have market making type systems that run automatically, and that sort of mechanism has swept through the financial markets (though as Broken Markets indicates, there’s some dubious stuff going on in that arena). It’s another to have an automated system making strategic risk decisions.
Yes, such systems can do very well – at least for a while. The problem comes when they hit markets for which they were not well specified. As just about any trading systems developer will tell you, most automated systems have a limited useful life. One needs to constantly be developing and redeveloping to stay on top of the markets (which begs the question of cost efficiency in cutting trader jobs).
Perhaps more importantly, though, automated systems have a habit of really getting hammered when the markets get hairy. We saw it happen during the financial crisis. We saw it happen during the Crash of 1987. No doubt there have been numerous other situations. It’s impossible to program a system to account for anything that could possibly happen, which means there needs to be human oversight somewhere to make sure the whole thing doesn’t go completely off the rails when things go wrong (which they inevitably will, as I noted in my What the Crash of 1987 Taught Me post.
This goes as much for individual traders as for institutions.
Hmmm…Maybe automated trading systems is how the machines will take over.