Must read (objective) report on the dangers of automated securities exchange.
This report identifies impersonal efficiency as a driver of market automation during the past four decades, and speculates about the future problems it might pose. The ideology of impersonal efficiency is rooted in a mistrust of financial intermediaries such as floor brokers and specialists. Impersonal efficiency has guided the development of market automation towards transparency and impersonality, at the expense of human trading floors. The result has been an erosion of the informal norms and human judgment that characterize less anonymous markets. We call impersonal efficiency an ideology because we do not think that impersonal markets are always superior to markets built on social ties. This report traces the historical origins of this ideology, considers the problems it has already created in the recent Flash Crash of 2010, and asks what potential risks it might pose in the future. Before considering its risks, it is important to point first to the many benefits of automation. The most important advantage has been a notable narrowing of the spreads in the equities market. In addition to lower transaction costs, the structure of the market now has competing centres for order matching, and provides direct access to small investors. Equally important, the audit trail generated by electronic trading has made surveillance more effective.