Computer vs trader

Indian brokerages are increasingly using sophisticated software to make trading profits. Such trading could increase overall liquidity, reduce 

transaction costs and increase market depth, but the regulator needs to ensure that it is above board. Sophisticated computer codes are able to spot even the smallest of arbitrage possibilities as they can run calculations faster and decide whether a particular market imperfection would be profitable. 

This machine interface should generate more trading as even the smallest of opportunity is acted upon. Of course, this ability to execute rapid trades is limited by the hardware sophistication, network speed and the capability at the exchanges. But as things improve, technological intervention in trading of financial instruments would rise. In the US, estimates of computer-based high-frequency trading range from 50-75% of daily trading. Machine intervention would increase as technology advances and the scale of opportunity becomes more apparent — traders at Goldman Sachs reportedly generated more than $100 million in revenues on 46 days of the second quarter; they lost money on only two trading days. 

The increased used of technology per se is not an issue, only it must not compromise the market. Even in the US the concern is not so much over the computer trades rather the increasing use of ‘flash’ orders, some traders can see the order flow before the broader market. In a market dominated by high speed nanosecond trading this does seem an unfair advantage. The Indian regulator would have to be vigilant that the application of technology is within the bounds. Sure, professional traders would be worried about the increasing use of software codes but the concerns appear to be overdone. Superfast computers would certainly be in a better position than day traders when it comes to spotting arbitrage opportunities. But the same cannot be said when it comes to trading a trend or a short-term move. In such situations the day traders need not fear the machines. Besides, there is the entire behavioural aspect of the market — opportunities arising from human emotions of greed and fear.