Blown To Bits

News-Driven Automatic Trading?

Friday, January 16th, 2009 by Harry Lewis

FT reports that new trading systems will be driven by news feeds, as well as historical data. Systems would pick out places where a company is mentioned, and predict what might happen to the stock price as a result, and use that information as the basis for buy-or-sell decisions. The hope would be to avoid some of the volatility that recent events have shown are caused by automatic trading systems (at least half of stock trades are now generated algorithmically, not by human decisions on the spot).

Unfortunately, as the article notes, events such as the precipitous drop in United Airlines stock price last fall were caused by reactions to incorrect news items. So we had better hope that the news analysis algorithms will be smarter than human judgment at figuring out which news items should be regarded as trustworthy. (Or perhaps, in the UAL case, how long after selling on the basis of a false rumor to wait before buying back in again, just before everyone else figures out the rumor was false.)

One Response to “News-Driven Automatic Trading?”

  1. yvette Says:

    I’m extremely skeptical of the idea of letting machines do all the work- especially in financial decision-making, mainly because it gives people the false sense of not having to be responsible for the decisions their computers made.