Is Software Eating the Market?

One of the great investing themes of our time is “Software is eating the world”.  Most of the time we think of this in terms of low skilled workers.  Ask an anesthesiologist how they like the new GE machine that automatically gives the right amount of sleeping gas to a patient in colonoscopy.

Of course, the volatility in the market has brought up the role of humans in the market.  Is their a role for them?  The NYSE says yes.  Other automated exchanges say no.

In the transition from 100% human markets to 100% computerized markets, I have noticed a lot of things.  Markets are more volatile today than they used to be.  The other day when the $ES_F moved around by handles and up and down hundreds of handles in seconds was a sign of a broken market.  Similarly, stocks and ETFs have had moves like that too.   this mean we need to go back to humans?  No.

At the same time, the way the market is structured with computers is hurting market participants.  The way orders are matched, the way the competition is tiered all hurts price discovery.  Markets compete on speed today, not price.  That causes markets to break down consistently.  I have seen slow markets break down as bad as fast markets.  We just notice it in fast markets because our fear indicators are lit up and burning a little hotter.

The longer poor market structure persists, the less confidence the American public will have in markets.  That will make it easier to hyper regulate and socialize outcomes in marketplaces of all kinds.  Doing that will spell doom for America.  That’s why it’s very important to restructure the market and make it compete on price and not speed or on first/second/third degree price discrimination the way it is today.