The use of automated trading in financial markets will only increase, replacing humans in day-to-day investment decisions.
According to CFTC data, the dominance of algorithmic trading in various asset classes is increasing, whether in foreign exchange, stocks, crude oil, or metals.
Macquarie Bank pointed out that automated trading strategies (ATS) accounted for 72% of U.S. stock index trading, 72% of international stock index trading, 84% and 70% of G10 currency and U.S. Treasury bond trading, and nearly 60% and 65% of base metals and crude oil trading respectively.
As transactions between machines increase and the human element decreases, Macquarie asks: Do fundamentals actually matter less?
Macquarie said that while it is true that the rules adopted by machines are set by humans, machine learning is proliferating and therefore the direct contribution of humans is declining.
"This also eliminates human 'hesitation' and 'thoughts', and the cumbersome repricing is completed in an instant – no matter which direction, therefore, a 5% increase in volatility is now equal to the new 1%."
Macquarie said this would not only lead to possible increased short-term fluctuations in various assets, but also create a situation where policy statements depend on the reaction of machines rather than human behavior.
"This has significant policy implications because asset prices have become a key variable driving real economic decisions, from consumption to investment." Macquarie said: "When the Fed communicates with the market, it is no longer aimed at people, but aimed at triggering machines and guiding transactions."
With no signs of a slowdown in automated trading in financial markets, one has to wonder whether it is wise to allow machines to determine asset price valuations and economic policy.
