Blogs & Comment

Preventing bubbles with robot traders

Three researchers from Brazil propose a method for preventing bubbles and crashes in stock markets, other than using monetary policy and financial regulation (which may be ineffective anyway, they say). The approach involves setting up a system of robot traders.
By robots they mean software-based traders, which have been around for years but used for private gain. And they have sometimes been the cause of extreme moves in markets (indeed, some observers blame the first generation of robots for the crash of 1987 as they were the tools for delivering so-called”portfolio insurance”). Nowadays, robot programsarefar more sophisticated, and responsible for billions of dollarstraded everyday.
The three researchers then ask: why not set up some public-service robot traders to counteract the imitative behaviour of investors and traders when it snowballs into extreme moves. In other words, create software-based trading programs to take contrarian positions at key junctures in the movement of stock markets so as to keep them from veering off to extreme heights or depths.
Robot traders can prevent extreme events in complex stock marketsby Nicolas Suhadolnik, Jaqueson Galimberti & Sergio Da Silva forthcoming in: Physica A: Statistical Mechanics and its Applications