Having mentioned the sensitivity of the markets with respect to the UK election results, it makes sense to point out Tim Maly’s recent post about automated trading programs and market movements.
The point is that 60% of stock trades are being done by machines, operating according to a set of algorithms and inputs, which (I’m pretty sure) do not include natural language parsing of the news.
Yet whenever the stock market makes a move, the financial press constructs post hoc narratives that explain what’s happened as a reaction to the news of the day, as if the news is what was was motivating the trades. […]
This fascinates me. Most stock market trading is being done by machines, but the stories we tell ourselves are about humans responding to new information. You can’t interview an algorithm about why it made a certain choice. In the absence of that knowledge, it seems clear that the financial press just makes educated guesses and acts as if correlation is causation. It’s speculative fiction.
Discuss. 🙂
I’m not an expert (although I am paid to pretend to be one) but I would suggest that the 40% of trades is where most of the value is added (or lost), and from which market movements draw their momentum.
Additionally, the quantitative investment systems are managed and maintained by humans, and respond to triggers based on stock prices that are the result of the 40% of trades. It’s not some amazing system of objectivity, but an automation of the guessing process that individuals go through.
Actually, I notice that these points have been made more eloquently in the comments on the original piece. Story of my life!