Does having greater dependence on computational algorithms make the market more rational?

[MikeH]

The flash crash caused by positive feedback was halted by an automated process, wasn't it? if a market moves by a certain percent then trading is suspended. My observation with automated trading is that it inherently assumes chartist thinking as it surely doesn't work by reacting to the latest news, e.g a computer can't interpret a press release as well as a human.

[Zoetstofzoetje]

the problem with automated liquidity is that is too opportunistic

[Lorizael]

Unless it's not opportunistic enough.

[Kuciwalker]

The flash crash caused by positive feedback was halted by an automated process, wasn't it? if a market moves by a certain percent then trading is suspended. My observation with automated trading is that it inherently assumes chartist thinking as it surely doesn't work by reacting to the latest news, e.g a computer can't interpret a press release as well as a human.

1) (main point) yes, automated trading assumes chartist thinking because in the absence of automated trading chartist thinking is correct. The oft-mentioned objection to EMH, that humans exhibit irrational behavior (especially 'trending' behavior) and we observe inefficiencies such as serial correlation of price movements, is a justification for automated trading. As we discover inefficiencies that result from human psychology, etc., the firms operating the automated traders have an incentive to build that knowledge into their programs and make the opposite bet.

2) (aside) I wouldn't count on that latter point remaining true for too long. "A machine/computer can't do X as well as a human" claims have a poor track record.

[loinburger]

Can a computer love as well as a human? I didn't think so. QED

[Dauphin]

1) (main point) yes, automated trading assumes chartist thinking because in the absence of automated trading chartist thinking is correct. The oft-mentioned objection to EMH, that humans exhibit irrational behavior (especially 'trending' behavior) and we observe inefficiencies such as serial correlation of price movements, is a justification for automated trading. As we discover inefficiencies that result from human psychology, etc., the firms operating the automated traders have an incentive to build that knowledge into their programs and make the opposite bet.

2) (aside) I wouldn't count on that latter point remaining true for too long. "A machine/computer can't do X as well as a human" claims have a poor track record.

My point re 1 is that automated trades improves efficiency, but doesn't add information to the system. It is entirely reliant on what trades are ongoing. Remove human initiated trades, and what trades would be conducted and what would the market look like. Any movement would not be due to fundamentals or new information.

Re 2. Sure. That day may come. It may not. It's not even remotely here yet. That's for sure.

[Kuciwalker]

My point re 1 is that automated trades improves efficiency, but doesn't add information to the system. It is entirely reliant on what trades are ongoing. Remove human initiated trades, and what trades would be conducted and what would the market look like. Any movement would not be due to fundamentals or new information.

As a practical matter it is adding information to the system. The various human biases and inefficiencies mean that the information "already there" is not fully reflected in prices; the automated traders that correct for those biases mean the prices better reflect the information human traders have discovered.

[Zoetstofzoetje]

mind you, markets, in part, work the way that they do because participants have expectations as to how it will behave. in other words, there´s a feedback cycle that keeps itself in motion.

the difference between a human and a computer is that the first one can figure out when something is ´odd´, even when that particular instance has not been previously encountered and programmed for.

[Zoetstofzoetje]

As a practical matter it is adding information to the system. The various human biases and inefficiencies mean that the information "already there" is not fully reflected in prices; the automated traders that correct for those biases mean the prices better reflect the information human traders have discovered.

you´re working on the classic assumption that price is or should be a reflection of some fundamental value, whereas instead there is a network of (competing) interpretations on value instead, the networked effects of which produce some price.

also, a price is always a thing of the past: on the market you can only play the game, and the price for which you buy or sell is dependent on a whole lot of factors other than ´fundamental value´, whatever that might be

[Dauphin]

As a practical matter it is adding information to the system. The various human biases and inefficiencies mean that the information "already there" is not fully reflected in prices; the automated traders that correct for those biases mean the prices better reflect the information human traders have discovered.

Yes, I am being imprecise (typing on my phone). information is created, by an abstract process of taking available information and stripping out biases etc. It's like saying arbitrage creates information. It does, but it's a technicality. You know that is not the information that I have explicitly referred to or what people mean in general.

If there were no human initiated trades, what would the market look like. Where would it derives its information.

[Kuciwalker]

Sure. But there are human-initiated trades, so I'm not sure what the relevance is.

[Zoetstofzoetje]

it´s not just the shavers that use that stuff, in ´retaliation´ the human investors had to start using them too...

[Asher]

Sure. But there are human-initiated trades, so I'm not sure what the relevance is.

Goes back to my post you found incoherent...

[Dauphin]

Sure. But there are human-initiated trades, so I'm not sure what the relevance is.

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This is precisely the argument I object to. Why is the market "supposed" to be based on human actors any more than any other profession?

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If there were no human initiated trades, what would the market look like. Where would it derives its information.

[Kuciwalker]

None of those are relevant as objections to automated trading. You need humans at some stage of the production process for cars, too.