Man vs. Machine: Time to Regulate?

With algorithmic trading accounting for 60% to 70% of trades, it’s no surprise that some mavens think such trading should be scrutinized and regulated. No good deed goes unpunished. When someone does something well, it seems there is always someone else to come along and complain they have an unfair advantage. In this case, the thinking is that man is at a distinct disadvantage when in battle with a machine.

It wasn’t always so. Computers started battling chess players in the 1960s, and man was able to keep his head high for a long time. But by the end of the 1990s, when reigning world champ Garry Kasparov lost to an IBM computer in a storied match, machine definitely held the upper hand.

Perhaps hardware and software on Wall Street is finally where they were against Kasparov more than a decade ago. But even if machine can consistently best man, is that any reason to hobble the machine?

Machines, after all, provide benefits. On Wall Street, they provide liquidity. By creating volume, the machines have helped create more liquidity than ever. With lots of folks trading at high volume, spreads have been reduced while costs have come down. If you don’t believe this, just look at commissions over the past decade or so during which algo trading has become commonplace: volume rocketed up while commissions headed in the opposite direction.

Plus, what’s the point of having markets if they can’t be free? If you are better than me at math, or you can program a computer better than me, why shouldn’t you have an advantage over me? Congress is talking about placing a transaction tax on high frequency trades. I say let the players play all they want, and those who win are probably the smartest, strongest or maybe just the luckiest. And that’s okay.

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