The economic system and profit motive has been a driving force that steers and even dictates social change. Investors and stockbrokers have been a major influence to these social changes, as they decide where money is allocated to serve a specific function. The reason why money is invested in some rather than other businesses isn’t always related to evidence that any given company will do better than the other. Rumors and trading floor gossip sometimes fuel speculations that reap major profits for some and painful losses for others. Losses that could mean the termination of jobs. Of course investment and successive financial gains can also lead to job losses, mostly due to automation where machines replace human workers.
Now in a strange yet somewhat satisfactory twist of irony, the people who have been making money out of money, have a growing chance of being replaced by faster and cheaper algorithms that can do their jobs better.
“The Foresight Project” by the “Government Office for Science” of the United Kingdom produced a report called “The Future of Computer Trading in Financial Markets” which investigates the trends of computer trading and its effects on financial markets. One of these effects is the replacement of human speculators by algorithms. Thus far about a third of UK trading is done by computers compared to three quarters in the United States.
Another effect created by the speed at which algorithms conduct their business is that interactions take place at a pace where human intervention could not prevent them. Think about it. A wrong calculation, a undesired self-reinforcing feedback loop triggered by a small delay might shock already quite volatile markets.
Should we consider these next nature algorithms and their possible negative effects as unavoidable as we would an earthquake? One thing is for sure, algorithms will take an ever prevalent role in our financial markets. Thank you profit motive.