“There are certainly forms of instability that have been introduced by algorithmic trading that will increase as we put more and more faith in these algorithms. The February 2018 flash crash was instructive. The culprit was a slightly esoteric exchange-traded product that has a rebalancing mechanism inside of it. And that rebalancing mechanism ended up destroying the product on one specific day when the market moved a little bit more than the product was designed to handle. The product was required to trade a lot of instruments in response to that move. But then those trades exaggerated a small move and it became a big move, which required more rebalancing—and everything spiraled out of control.”
USAGOLD note: We have consistently written over the years about the “madness of machines” – the potential for a financial panic spun by algorithmic trading that would be no different in its consequences than one spun by its human creators. This interview of an individual at the heart of the algo-based trading system is a must read for those who want to understand what has become, for good or ill, a dominant force in investment markets.
Image by Creepeurman [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)]
Repost from 3-4-2019