Shadow falls across the future of markets

The Life: Dark Pools: The rise of AI Trading Machines and the Looming Threat to Wall Street charts the 25-year ¿arms race¿ of computerised trading. Does it hit the right frequency?

Review: Dark Pools: The Rise of AI Trading Machines and the Looming Threat to Wall Street, by Scott Patterson, £6.75, (Dh39)

A It has not escaped the notice of investors that western stock markets have been malfunctioning.

Traders report giant spikes in stock prices lasting mere minutes or even seconds, while profits on trades are gobbled up by supercomputers sweeping the market at speeds faster than humanly possible.

No wonder retail investors are fleeing US markets in droves - the game is increasingly rigged against them.

Such is the charge laid out in Dark Pools: The rise of AI Trading Machines and the Looming Threat to Wall Street, a new book by Scott Patterson, which charts the 25-year "arms race" of computerised trading.

Technophobes can relax. The story is told through a battle of egos among pioneering computer nerds who squared off in the 1990s against the Nasdaq and the New York Stock Exchange in an effort to make trading fairer - or so they hoped.

By removing humans from the equation, the idealistic programmers aimed to eliminate scalping by the market makers who dominated trading floors.

Over the decades, the open-outcry trading pits of old were slowly replaced by algorithms and new venues with names such as NYSE Arca, BATS Global and Chi-X entering the business lexicon.

But the irony is these programmers ultimately inherited the mantle of the scalpers they forced out of business on Wall Street.

Not only that, the firms engaged in high-frequency trading are finding it increasingly difficult to make money and are looking to the next big thing, such as hedge funds controlled entirely by artificial intelligence (AI) software.

Meanwhile, high-frequency trading continues to make headlines.

This month, an algorithm misfiring at Knight Capital punched a US$440 million (Dh1.61 billion) hole in its balance sheet. Knight, the biggest market maker in thousands of US stocks, saw its business collapse in about 30 minutes.

And, as if to underscore the risks to the banking system, another so-called "rogue algorithm" at Royal Bank of Scotland sawed through the foreign exchange markets just a week later.

Engagingly written, memorable and with a constant spotlight on the questionable social value high-frequency trading brings, Dark Pools gives a head start for anyone looking to understand what is likely to be the next regulatory battle over the future of markets.

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