Algos Behaving Badly

"If a human trader behaved the way an algorithm behaves, there would be fistfights on the exchange trading floor."

That comment was one of the more memorable and succinct quotes from a panelist at the Advanced Trading BuySide Summit on Amelia Island, Florida earlier this week.

Advanced Trading gathered some of the top buy-side representatives from major asset management firms to mid-sized hedge funds to smaller prop trading shops to discuss and debate the issues that vex and inspire the buy side. Although the topics ranged from Dodd-Frank and the Volcker Rule to market structure the panelists and audience members often returned to the impact HFT has on the buy side.

On a panel discussing rogue algorithms and the marketplace, a panelist shared his thoughts on what reaction a human would receive if he were to copy the behaviors of a trading algorithm on an exchange trading floor. In the off-the-record session, he said that algos ping the markets and exchanges hundreds if not thousands of times an hour with bids and offers and almost always withdraw them immediately to test out the asking price.

If a person went around the trading floor and did this, our panelist said, "there would be fistfights on the exchange floor."

That just might make a demonstrator from Occupy Wall Street smile.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio