Technology Has Unsettled Financial Markets Permanently

Well, here is a very terrifying article. Is technology set to completely unsettle the stock market? It is certainly no secret that over the past few years algorithms, artificial intelligence, robos, etc have been responsible for more and more of the trading in the stock market. It is now estimated that only 10% of trading is done by humans. So, does ANYONE really understand how those algos work? Now, throw in ETF’s and how they are structured. Does ANYONE actually know what’s in all those proprietary structured ETF’s? Quick answer; NO. Certainly not the new Chairman of the Federal Reserve who testified before Congress last week that he may need to look into some of those issues. So, with tens of trillions of dollars being whipped around in nano-seconds by automated proprietary algorithmic programs using not totally understood ETF’s as the trading vehicle of choice, WHAT could possibility go wrong? Answer; NO ONE KNOWS! So, with volatility beginning to rise looks like we can blame technology for losses. Anyone know a good lawyer to sue robos? Strap in traders.
(Bill Taylor/Managing Editor)

“At his coming-out hearing as chairman of the Federal Reserve on Feb. 27, Jay Powell made all sorts of news in finance-land, including a suggestion that the bank saw potentially faster inflation ahead. Also notable was his assessment of the causes for the volatility that roiled Wall Street and saw trillions of dollars lost, gained, lost, and then regained in a matter of days in early February. In wonk speak, Powell remarked that he didn’t think that ETFs—exchange-traded funds—were a particular culprit, though he conceded that the issue deserves further study.

Powell’s reassurance notwithstanding, it is at the least too soon to draw a conclusion. Too much has changed too quickly in the past few years to say with any confidence that we understand the interplay of humans and machines as applied to markets. The trading of ETFs—particularly when it is rapid and automated—is but one of many concerns about the functioning of stock and bond markets. Put simply, transactions are now governed less by people shouting orders and pushing paper and more by software and computers. That shift, affecting tens of trillions (yes, trillions) of dollars globally, merits more attention than it currently receives.

The rise of ETFs highlights the increasing role of technology in markets. ETFs are low-cost baskets of stocks or bonds that mirror indexes or reflect investing themes, such as semiconductor makers or global consumer stocks.

They can be bought and sold like stocks, and now account for as much as 30 percent of all US stock trades. But ETFs trade as units. If I own an ETF that mirrors all large US companies and I decide to sell, a tiny piece of every company in that basket gets sold. The same is true for traditional mutual funds, which have been around for decades, but mutual funds can only be traded once daily. ETFs are traded in fractions of a second, which means that every company with listed shares or bonds can also be traded in fractions of a second, as quickly as a computer program can process the data. Those programs, and the algorithms that drive them, are beginning to upend and distort the multi-trillion-dollar business of buying and selling stocks and bonds…”