Many Stock Market analysts are of the opinion that computer initiated trading could be the reason for flash crashes which shudder the markets periodically. One such analyst is Brad Katsuyama, the Chief Executive Officer of exchange IEX Group. In a media interview, the analyst said that complex software conducting trades at the blink of an eye can be a potent threat to the market stability. He said that the algorithms extract money from volumes. The complex codes spark what is known as 'flash crashes', a phenomenon where the assets suffer rapid value see-saw within a few seconds. It is impossible for any human operator to tackle such gigantic volumes within a super-short span of time.
Katsuyama further elaborated on his apprehensions, saying that the biggest risk lurking within the market is the fact that about 60 percent of the market volumes are done by computer programs. These programs, he said, as a matter of fact, have no idea of what the companies concerned really does. The underlying mathematics simply react to the available data. He believes that this non-human trading is a dangerous trend.
The IEX boss proved his point by citing the example of Amazon. The company stock displayed unusual spasms of volatility when the company shares went to a sharp decline on June 9. The date is important as June 8 was the day when a few of the biggest names in the technology industry, like Facebook, Netflix, Apple, and Google parent Alphabet, shot to their historical highs. Katsuyama said that it is impossible that the stock market value of Amazon could vary by billions within a space of a few seconds.
Variance and IEX exchange
The day when Amazon made such dramatic moves, the technology-heavy Nasdaq Composite Index closed 1.8 percent down. The Standard & Poor 500 Index ended lower. The Dow Jones Industrial Average or DJIA, in contrast, finished a little higher. The results underline strange trading as equity indexes usually end up higher together on the same day.
IEX in 2016 won due approval from Securities and Exchange Commission (SEC) to start a stock exchange. The new stock exchange is expected to incorporate a speed bump to end the volatility of the software algorithms. The company said that this will equalize the trading field between the fast traders and the slow traders. IEX hopes to end the dominance of the fast traders over Wall Street.