The Machines Ate My Homework

Are we living through the re-mystification of the world?

Much that goes on around us is baffling these days. Financial market movements, for example, seem increasingly mysterious. Why, after close to a decade of sustained recovery from the nadir of early 2009, did global stock markets sell off so sharply this month?

We who claim expertise in these matters can tell stories about what just happened, but the nasty feeling persists that we haven’t a clue. Twelve weeks ago, I warned that “financial red lights” were flashing again. Was I prescient, or just lucky? My argument was that, as central banks raised interest rates and wound down the asset purchasing programs known as quantitative easing, there was bound to be downward pressure on stock markets. I also argued that, for demographic and other reasons, the end of the prolonged bond bull market was nigh. I still like that story, as it’s based on familiar patterns from financial history.

Yet the market gyrations of the past two weeks have elicited a host of more exotic explanations. Each stock market correction has its villains, the product or people whom everybody else can blame for their losses. This time around, there was a simple formulation: it was all the fault of “the machines” or “the algos” (short for algorithms).

Nobody doubts that computers play a far larger role in financial markets today than ever before. It seems reasonable to assume that automated transactions by index tracking funds, not to mention high-frequency trading by quant funds, tend to amplify market movements. Yet there is no need to invoke these novelties to explain the return of normal financial volatility. There is, to my mind, a superstitious quality to the phrase “It was the machines.”