Tags: Computerized | trading | markets | risk

New Yorker's Surowiecki: Computerized Trading Puts Financial Markets at Risk

By    |   Monday, 18 May 2015 11:51 AM

Computerized trading dictates many of the moves in financial markets, and that could mean big trouble, says James Surowiecki, The New Yorker's financial columnist.

"In the popular imagination, investing is about economic fundamentals. Investors scrutinize companies, weighing factors like cash flow, product lineup, and merger plans," he writes.

"But most trading these days has nothing to do with any of these things. Instead, it’s all about what the market is going to do in the very short term—often a matter of milliseconds. Most of this trading takes place too fast for humans to be involved, so the decisions are left to computers."

But with computerized trading has come a scam called "spoofing," where traders place huge buy or sell orders, only to withdraw them just before execution, roiling the markets. Spoofing is thought to be a major cause of the May 2010 flash crash, which sent stocks plunging for several minutes.

"For now, spoofing is a minority sport and rarely has a big effect on the market," Surowiecki explains. "But its success points to a basic problem of a market dominated by short-term robot traders: it’s exceptionally vulnerable to feedback loops."

Elsewhere on the financial-market front, while stocks are hovering near record highs now, star mutual fund manager John Hussman, president of Hussman Investment Trust, doesn't think it will last.

"On the basis of valuation measures best correlated with actual subsequent market returns, we can say with a strong degree of confidence that the S&P 500 would presently have to drop to the 940 level in order for investors to expect a historically normal 10-year total return of 10 percent annually," he wrote in a recent commentary.

That 940 figure for the S&P 500 would not represent some extreme, catastrophic outcome. It’s not a level that would even represent undervaluation from a historical perspective. It’s the level that we would associate with average, historically run-of-the-mill long-term equity returns. As we observed at the 2000 peak, 'if you understand values and market history, you know we’re not joking.'"

A move to 940 for the S&P 500 would represent a 56 percent drop from 2,120 Friday morning.

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Computerized trading dictates many of the moves in financial markets, and that could mean big trouble, says James Surowiecki, The New Yorker's financial columnist.
Computerized, trading, markets, risk
373
2015-51-18
Monday, 18 May 2015 11:51 AM
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