The Rise of the Machines

Knight Capital: Just a Warm-Up For the Big One? | ZeroHedge.

There is no such thing as a rogue algorithm. The algorithm does whatever the human beings programmed it to do. Since humans are the ones giving instructions to the computers, it should not surprise anyone that herd behavior is being exaggerated by the machines.

When Knight’s computers began buying high and selling low, all of the other machines in the market quickly moved to take advantage of this dynamic.

Nowadays, rising markets into the end of the day portend a bigger rise in the last hour due to all of the machines piling on and taking advantage of this self-fulfilling momentum.

The flash crash was a taste of what happens when the process works in reverse; selling leading to more selling as machines reduce exposure in a falling market, just like they were programmed to.

The next crash will be faster and harder than previous ones due to this dynamic.

 

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