Automation boosts market volatility, analysts say
High-frequency trading can lead to fear and panic among investors
Computerworld - Over the past month, stock market indices have looked like a lot like a Six Flags roller coaster, with 500 point swings either way -- often on a daily basis.
The Dow Jones Industrial Average finished at 12,747 on July 21, fell to 10,719 on Aug. 10, rebounded to 11,529 on Wednesday before dropping to 10,953 on Thursday. The Nasdaq stock index has experienced a similarly erratic ride.
Some observers say automated computer systems can be blamed for at least part of the accelerated unpredictability of the markets
"[The recent] volatility is absolutely crazy," said IDC analyst Sean O'Dowd. "I don't know a better way to put it. We've seen record lows to record highs in a span of days, not months or years," O'Dowd said. "That's what electronic markets have done."
Up to 70% of trading volume is now consummated by computerized high-frequency trading systems, according to O'Dowd.
David Furlonger, an analyst at Gartner, said proprietary algorithms developed by hedge fund and other Wall Street firms are making decisions without human input. "That doesn't necessarily allow for more analytical, reasoned judgment by a human," he said.
Such firms generally build their own computer infrastructures and design proprietary algorithms that consider the timing, price, and quantity of a trade order, and then initiate the stock buy or sale, all without human intervention.
A little history
In 2003, analysts projected that the financial services industry would spend some $6 billion over two years replacing manual workflows with a new scheme dubbed straight-through processing (STP) of trades.
In simple terms, STP is the replacement of manual processes with an unbroken electronic stream of information that travels from the broker/dealer systems to the clearinghouse. STP uses messaging standards, translation middleware and networks that link investment managers, broker/dealers, custodian banks and clearinghouses.
In 2005, the New York Stock Exchange (NYSE) moved into the electronic exchange marketplace by merging with Archipelago Holdings,a pioneer electronic trader. The Nasdaq Stock Market followed suit by purchasing Instinet Group, the other leading U.S. electronic trading company at the time.
Fears that automated trading could cause problems have been fulfilled at times, such as last October when a so-called "flash crash" saw the Dow plunge by almost 1,000 points in a half hour, wreaking havoc on the financial markets.
An investigation by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) determined that automated trade execution caused the "flash crash." An SEC report said automated trade execution system had flooded the Chicago Mercantile Exchange's Globex electronic trading platform with a large sell order causing a panic among investors.
The Financial Industry Regulatory Authority (FINRA), the enforcement arm of the U.S. Securities and Exchange Commission (SEC), responded by enacting rules requiring a pause in the trading of individual stocks when the price moves 10% or more either way in a five-minute period.
Congress has not investigated automated trading systems, according to O'Dowd and Furlonger.
Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at @lucasmearian, or subscribe to Lucas's RSS feed . His e-mail address is email@example.com.
Read more about Financial IT in Computerworld's Financial IT Topic Center.
- 18 Hot IT Certifications for 2014
- CIOs Opting for IT Contractors Over Hiring Full-Time Staff
- 12 Best Free iOS 7 Holiday Shopping Apps
- For CMOs Big Data Can Lead to Big Profits
- Slideshow: 5 ways to lock down your mobile device
- Slideshow: 10 mistakes companies make after a data breach
- How to rob a bank: A social engineering walk through
- Which smartphone is the most secure?
China says to Chiang Kai-shek all Bitcoins at the door.
China marches long and hard over internal financial institutions, proclaiming that Bitcoins "should not and cannot be used as a currency". The news sent Bitcoin exchanges into a dive like cormorants in the deep China Sea. But all is not lost -- or is it? Bitcoins have been bubbling back to the surface, or has China's stance drained all enthusiasm? In IT Blogwatch, fearless leaders and bloggers quote pearls of wisdom from the little red book of Bitcoin. Not to mention: Financial advice from Whiz and Ice...
- IT Certification Study Tips
- Register for this Computerworld Insider Study Tip guide and gain access to hundreds of premium content articles, cheat sheets, product reviews and more.
- Make or Break: New Auto Products Must Go To Market On Time
- This Webcast quantifies the value of time to market for the auto industry and highlights how Primavera Enterprise Portfolio Management can help organizations.
- Stock Shock: The effect of project and portfolio management on share price
- In this independent report, you'll see the intrinsic connection between long-term capital investment and short term market performance -- and how this can...
- Hedge Your Bets
- This report explains how visibility and increased governance is key to reducing risk.
- In the Firing Line
- CEOs Are Increasingly Being Held Accountable; How susceptible is the CEO's reputation to poor performance across the project portfolio?
- The CISO's Guide To Virtualization Security
- This guide describes the security challenges within virtualized environments and shows how to apply the concepts of Forrester's Zero Trust Model of information... All Financial IT White Papers
- Live Webcast Research Report: The Big Data Opportunity for HR and Finance If CEOs, CFOs, CIOs, and CHROs want to drive their businesses forward, they will need to quickly recognize the enormous value of big...
- Live Webcast The Freedom to Run Your Business Your Way Vendors are challenged to create flexible systems that customers can tailor to particular business strategies and industry needs. But the flexibility should not...
- Live Webcast The Business Value of Human Capital Management for Finance View now >>
- HR and Finance Were made for Each Other View now >>
- The Value of Human Capital for Finance Professionals View now >>
- The Business Value of Human Capital Management for Finance View now >>
- The Freedom to Run Your Business Your Way Vendors are challenged to create flexible systems that customers can tailor to particular business strategies and industry needs. But the flexibility should not...
- Research Report: The Big Data Opportunity for HR and Finance If CEOs, CFOs, CIOs, and CHROs want to drive their businesses forward, they will need to quickly recognize the enormous value of big...
- All Financial IT Webcasts
Computerworld's Best Places to Work in IT 2013 list featured Quicken Loans, Securian, Vanguard and other top finance organizations. Honorees say the distinction helps them recruit top talent and boost staff morale.
Want to join this elite group? Nominate your organization for our 2014 list.