The stock market is run by wild robots we don't fully control – New Scientist

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empty seats

Gone to lunch, or just gone?

Qilai Shen/Panos

ROBOTS are taking over Wall Street. “Technology has utterly transformed the financial system,” says Andrew Lo, an economist at the Massachusetts Institute of Technology. “The vast majority of day-to-day trading is done purely algorithmically.”

More and more human traders are being shown the door. And researchers like Lo are beginning to find that the more the stock market is run by machines, the less it behaves like one. Today’s markets are an ecosystem, a zoo of bots grazing on our pensions and investments – and no one quite knows how they work.

Is this newly autonomous market a route to financial prosperity, an end to boom and bust? Or are we a few lines of code away from financial doom?

To understand why machines are taking over, it helps to look at how perceptions of the stock market have changed following the financial crisis of 2007-08. It is increasingly clear that for the average person, investing is a mug’s game. Individuals have little hope of picking successful firms to back, while giving your money to investment managers who aim to beat the market often sees any gains being eaten away by a laundry list of opaque fees.

The alternative, espoused by the likes of finance tycoon Warren Buffet, is to invest in index funds. A market index is a collection of companies that give a snapshot of the market’s value at any given time, like the FTSE 100 and the Standard & Poor’s 500.

Largely because the stock market as a whole has been on the rise since the financial crash, index funds