Inside Money

Business writer David Chaplin blogs on personal finance

Inside Money: Bot or not: man machines markets

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Man or machine? Is there a looming threat posed by computer trading and dark pools? Photo / Richard Robinson
Man or machine? Is there a looming threat posed by computer trading and dark pools? Photo / Richard Robinson

I have just dipped in to 'Dark Pools: the rise of AI trading machines and the looming threat to Wall Street' the latest book from Wall Street Journal contributor and author, Scott Patterson.

The book, according to the back-page blurb, "comes to some chilling conclusions".

Cool.

From what I've read so far - the introduction and the back cover - it looks like the machines have taken over and will blow up the financial world.

"They knew that, as the high-octane global trading grid became faster, more and more driven by computers souped-up on light-speed AI systems, [a market calamity] was inevitable," the introduction almost ends on.

This may be a little over-cooked but the rise of computer-based high-frequency trading and the shift away from traditional, transparent exchanges is certainly topical.

Across the Tasman this week, the ASX, for example, has had to allay concerns of government and market participants about the potentially detrimental effects of high-frequency trading and dark pools (Ironically, the ASX itself runs dark pools, one of which closed last week due to lack of interest.)

Patterson's book goes further, however, proposing the geeks have built a giant network of bots that are algorithmically picking the pockets of more human-based investors while trying to out-compute each other.

"If computers are trading with each other, does that mean that people have lost control?" the back page blurb asks.

In 'The hour between dog and wolf' author, trader and neuroscientist, John Coates, poses a much more interesting question: have people ever been in control of markets?

His answer is sort of, but not as much as they think they are, especially when it all turns nasty.

Coates' book, sub-titled 'Risk-taking, gut feelings and the biology of boom and bust' is a great read, blending a practical description of the life of a financial markets trader with biochemistry.

He expertly debunks an already tenuous notion that financial markets are solely run according to the cold, logical rules which computers are so good at hijacking.

We're warm-blooded animals, Coates argues, inescapably captive to our intricate biological systems. But unlike Rob Cameron in the NZ Herald this week ,Coates reckons the boom-bust mechanism can be constrained.

I don't want to give the ending away but it's something to do with testosterone.

- NZ Herald

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