Paul Wilmott, in a recent New York Times editorial, put forth the argument that financial trading by algorithm has gotten so fast that it threatens to bring down the entire system:

“If a fall in the market leads to people selling according to some formula, and if there are enough of these people following the same algorithm, then it will lead to a further fall in the market, and a further wave of selling, and so on — until the Standard & Poor’s 500 index loses over 20 percent of its value in single day: Oct. 19, Black Monday. Dynamic portfolio insurance caused the very thing it was designed to protect against.”

This feels like a head-on assault on analytics. And wouldn’t dialing back the speed and power of the algorithm’s that drive trading require some sort of unilateral disarmament or else no one will want to give up even a sliver of competitive advantage.  The underlying problem, according to Wilmott, is this:

“…the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market. Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care.”

In the end, however, is the problem with the algorithm or the market? When the repeating rifle and then the fully automatic weapon were invented, could one cry, “Stop, that’s not fair and won’t fit with our strategies and tactics honed over decades of fighting with single shot weapons”? Sorry for the war analogy  but we are talking about Wall Street after all?

What do you think? Should there be speed limits on automated trading? Or should markets adapt to what is possible for the traders? After all, an unsustainable market is in no one’s interest.