Glitch Trading


Here is what blows me away about the latest stock market madness.

In this Newsweek article, we learn that 60% of stock market trading volume is automated. Machines are doing lightning fast trades according to complex quant-designed algorithms. The machines are needed to do this because they can make decisions faster than people and when you are dealing in fractions of a penny, speed matters. There’s a lively debate going on about whether or not these battlebots (yes, they are called that) are a good idea, but they’re not inherently bad. There are plenty of decisions better outsourced to machines. Trading could be one of them.

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. For example, here’s Reuters confidently explaining today’s nose-dive in terms of various events that made headlines, none of which are a computer glitch. (15 minutes later, Reuters tweeted the alternate explanation.)

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.