If you’re wondering what happened last week when the stock market took a thirty second drop, you wouldn’t be alone. Ever see the Will Smith film I,Robot? It’s has a standard sci-fi plot line where computers start killing people and there’s nothing they can do because they’ve unknowingly programmed themselves out of existence. Well…..that’s not too far from the concept of what’s called modern-day “high frequency trading”.
It’s called high frequency trading, and these programs can react to news so quickly they cause a dizzying amount of damage.
1) Computers use Key word searches. They’re programmed to respond to key word searches that would, for example, respond to a headline that had the words “White House” and “explosion” in it and immediately institute a sell program. So, basically, they’re dumb and they read the news in a dumb and shallow way. They have no way of deciphering between what’s real and not or questioning anything with cynicism. The ideal system would be to scan keywords and then brings them to the attention of traders.
2) Trend following. The object is to buy low and sell high (duh). It doesn’t care what the news is. If a program can sense a sudden outsize move in the market to the downside, it starts selling…then buys when the market bottoms and begins to turn around. Easy enough, if you have a program clever enough to catch the bottom.
3) The most important thing to remember–don’t trust everything you read. The scary part is that your computer doesn’t know the difference.