February 12, 2018
Robots being blamed for market drop
For months now, the stock market has seen record highs, climbing and climbing, week after week. Then, over the past week, the market has plunged. Now, everyone is trying to figure out why, and more than a few fingers are being pointed. The “usual suspects” are being “credited” on the TV economics shows, but at least one group catching some heat is a bit unusual.
Some market analysts are blaming robots for the recent market downturn. On the surface, that seems crazy. It’s not like robots are making buying and selling decisions … except when they are. In recent years, more and more financial firms are trusting learning computers to analyze the market and determine when and what to buy and sell.
The reasoning behind taking humans out of the mix in some market transactions is that “smart” computers are able to buy and sell much faster than any human. Using complex algorithms to trade has become so common, that according to the BBC, some market analysts estimate upwards of 50 percent of all trades on the S&P 500 are made by machines.
So, that brings us to why robots are being blamed for the recent mass sell-off. Because of the downturn and the trend in the market, countless computers were “told” by their formulas that the time to sell was RIGHT NOW. So, sell they did, and it sent the Dow Jones Industrial Average plummeting 800 points in the span of ten minutes. Analysts searching for an explanation say it had to be machines making those calls.
Programmers hoping to fix the glitch do have a digital “paper trail” to follow. Analysts believe the trigger was a stellar US jobs report that revealed outstanding wage growth. That led to government bonds slipping. As prices fall, interest on bonds rises. That’s what the ‘bots were looking for. As soon as the yields hit a “magic number” the programs were coded to sell. The automatic trading led to other trading, triggering what some analysts described as “freefall.”
The sales led to more sales and then mass trading that spilled over into international markets. Complicating things even more, some of the algorithms were set to sell short in order to buy low, which only exacerbated things.
From a consumer PR standpoint, while robot trading is common among traders, it may not necessarily be common knowledge among investors, especially those who are trusting their retirement accounts to secondhand monitoring sources. So, while the news of a “freefall” is bad, the news that it was caused by robots who could easily do it again, caused greater concern… and it’s this concern traders and investment companies will need to address in the coming months.