Automated trading was blamed for the stock market crash in 1987. That was back when stocks were usually traded between people standing at stations in the stock market’s building. Even then, a series of simple algorithms were able to drop the market. Now,
“It’s important to remember that a small fraction of the trades on stock markets these days — maybe 10 percent — are made by real-life human beings deciding to buy or sell shares in this or that company.” – World Economic Forum
Another 40% are trades based on packages like index funds, many of which are automated as well. The rest are much more sophisticated algorithms trading stocks without human intervention. Stock trades are less about evaluating a company’s prospects and more about exploiting any small leverage and magnifying its benefit by using large amounts of (frequently borrowed) money. This is creating a disconnect between the stock market and the economy, as well as heightening potential volatility and creating the opportunity for events like flash crashes. The speed of transactions are so critical that nano-seconds matter, which means moving as close to the center of the transactions as possible. The old model of people buying and selling stocks is hollow with only a thin film of humans participating. Inside is another world that may be beyond human understanding and control, a bit worrisome because many assume the market is the economy and that these are institutions that serve humans, not computers. If it seems like the stock market and your personal finances aren’t connected, this may be why.