Programmed Trading: Just a Scapegoat
I’m not too surprised to see the mainstream media quick to call out “program trading” as the cause of the Dow’s temporary 1000 point fall. Their weakest claim is that computers, unlike humans, have no emotion and no way to actually know what stock prices should be. Um, duh?
What is Programmed Trading
Program trading is the use of computers to trade the stock markets with intensive algorithms. These algorithms, designed by humans, are tested five, ten, even one hundred times to try to find profitable trades based on certain criteria. During the Dow’s plunge, program trading became the instant scapegoat, even though program trading by default is no more dangerous than human trading.
What individual investors fail to see
The global financial markets are far more complicated than the buy sell orders most people think of. Thanks to the Ivy League mathematics graduates that populate trading desks and investment banks, the markets are so intertwined and nearly perfected that they’re actually the most efficient they have been in decades. High volume is a good thing, it brings about liquidity. Arbitrage is a good thing, it helps the market find a price closer to equillibrium. However, if you’re a politician, you see program trading by computers as part of the problem, even if it more closely resembles the solution.
The Dow’s Loss will Blow Over
The Dow’s plunge on Thursday will be nothing more than a footnote in history. (If it even deserves that!) Problems happen. Computers go crazy. People lose money. Welcome to the stock market. Money knows no emotion. It doesn’t know greed, it doesn’t know sorrow. The stock markets are perhaps the purest form of raw capitalism. May only the strong survive while the weak are wiped out.
