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It does worry me that a trader can start up a sell algorithm, to say hedge a holding, and then assume the algo technology will identify when it is moving into dangerous (whole of market moving) territory and stop. The absence of inherent safety parameters
(like say checking on the % change in price over time as a check) may lead to a market moving significantly for an artificial reason.
I guess the FSA should be on the case. I'd like to think the requirements around allowing a human access to a live exchange would apply equally to technology - you just have to know when to stop sometimes and unless you tell it, the technology won't.
Ploughing through that code is going to be a tough one though and I doubt they will ever find the wood for the trees. Suspending that part of the market when trading looks really odd (through technology I guess) is probably the best you can hope for.
Yes it's difficult but not impossible. Surely they can use technology to produce an audit check of the code. The Regulator needs to set parameters that they can check code against and use an AI type system that updates the audit parameters as and when new
code is introduced.
It's too important for the FSA to stand back and allow a free for all. Hedge Funds can be set up and closed very quickly and already there is enough experience to show that there are some very sharp people out there that will prey on the FSA's lack of capability.
Frankly, the very notion that regulators with their shoestring budget can do a meaningful code review of algo trading software that's the outcome of tens, if not hundreds, of million dollars in investment by investment banking firms, sounds a bit strange
Sounds like you think that if the regulator is short of cash they give everyone a free for all. Since when does good and sound regulation depend on the size of budget? Its a very strange notion i think
The Regulator must move with the times and if that entails learning new skills and being able to find methods to regulate Algo trading via code then thats what they must do. Otherwise why have regulation if its meaningless?
The recent Amazon algorithm issue caught my eye - with a widely reported sell price escalated to $23million. CNN for one reporting: "Amazon seller lists book at $23,698,655.93 -- plus shipping"
That's what can happen to markets when machines takes over. Of course valuing a book is easier for humans than equities - you have a rough idea of worth so you don't actually buy at those prices. But its harder with things that you don't necessarily yet
understand, such as equities and even tulips, so the market becomes real (or a false real, if there is such a thing) and people do buy.
What is needed is some AI to be developed. AI is comming and maybe this will eventually prove the answer , otherwise human grey matter looks like being arround for some time
19 Sep 2007