Wall Street's recent wild ride isn't driven by nervous portfolio managers, funds or any other human traders. Instead, machines are making the trading decisions.
Computer programs execute buy and sell orders based on complex algorithms and formulas, without a human involved in the process. On a typical trading day, computers account for 50% to 60% of market trades. When the markets are extremely volatile, they can make up 90% of trades.
The Dow fell nearly 1,600 points at one point Monday, before recovering more than 400 points to end the day down 1,175. On Tuesday, the Dow opened down 567 points, then raced to a 350-point gain shortly after.
"A machine is making a decision based on the fact that we reached a level to buy or sell," said Art Hogan, chief market strategist for B. Riley FBR. "The problem with that is everyone's algorithms are pretty much the same, they key on the same trigger points. That's causes really fast momentum swings."
It's not that humans didn't play any role in the stock market's moves. A stronger-than-expected wage increase in Friday's jobs report led investors to make trades based on the assumptions about what that might mean for inflation and the Federal Reserve's actions going forward.
But once they gave the stock and bond markets that initial push, the computers took those initial moves and ran with them.
There is one advantage to this kind of selling -- the machines don't suffer from doubts and fears the way human traders may when they sense an opportunity to buy.
Experts say human traders might be slower to get back into a battered market. And human reluctance could allow a sell-off to go on longer and deeper.
Source: CNN Money
Trader Bozhidar Arabadzhiev
Original post: Machines are driving Wall Street's wild ride, not humans
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