The Rise of A.I. Trading Machines and the Looming Threat to Wall Street - Book Report/Review Example

Book Review: Dark Pools 1. The book Dark Pools: The Rise of A.I. Trading Machines and the Looming Threat to Wall Street has a central focus, and after reading the book carefully it might seem that the focus is singular and unique. Patterson, who is the author of the book, has used the word ‘rigged’ on a number of occasions. However, the most prominent usage of this word in the form of an adjective is found at page no. 281. By direct allegations of rigging the online trading systems, Patterson makes it evident that he thinks the experts in IT enabled systems are doing a fowl play. According to the author, they have turned business into a “rigged game” (281). But in the same context, what is actually meant by rigged? Are there concrete evidences that IT experts, who are there in the business world as entrepreneurs too, are intentionally creating technical problems? If an investor is caught red handed while doing a fraudulent activity, all investors cannot be held responsible for that. Likewise, all IT experts and algo traders cannot be held responsible if a particular individual or group attempts to corrupt the information systems. However, Patterson has not expressed his doubts regarding the algo traders in a vague manner. His opinion may have some substance. For example, Patterson has stated that monopolist attitude of a syndicate of business people may try to do such things so that even honest business people can be deprived of investor confidence (294). He has shown historic examples of such kind of foul play from the banking sector by writing well researched facts about “fat-cat bankers” (136). However, the following quotation appears to be the strongest point he has been able to make: “In the late 1990s, when spreads were typically about twelve-and-a-half cents wide, the amount of stock a market maker would buy or sell in a single trade tended to be in the thousands of shares. Now the amount was typically one hundred or two hundred shares.” (Patterson, 281) Explaining this quotation (without delving into terminological intricacies), I must state that Patterson has attempted to use as much simple English as possible to describe the complexities of equity markets to a general reader. However, he has consciously tried to use statistics as well. A general deduction from this point raised by Patterson is: Transparency and amount of share trading in American equity markets have decreased instead of increasing with the rise of computer based information systems (CBIS) in this market segment. Today, individual and small scale investors have far less chances of buying the amount of share they wish to buy. After the use of business specific IT tools has tremendously increased, an average investor is generally disappointed when he/she discovers that the amount and the quality of equities he/she managed to buy is below his/her expectations. 2. If a reader wishes to find out that exactly how algo traders are facilitating positive or negative changes in market, then this book is not enough. The biggest reason behind this is that Patterson is negatively criticizing algo traders throughout the book. However, a constructive criticism and examination of facts might need wider study. For example, Albinus has used a phrase like “knight moves” to describe the tactical situation of equity markets. The natural question consequential to this kind of views is: Are the equity markets a kind of market place, or are they battle fields? A way to manipulate markets is “trade bots” (Patterson 188), which are investigative scripts that can be triggered from the server side of a CBIS. Although this kind of claims is still not scientifically verified (or verifiable), it cannot be denied that dishonest IT service providers can develop powerful scripts and interceptive methods such that they can break into the confidential financial data of a financial company without its knowledge. The popular facilities like online trading can be hacked, and it has become easier for experts to steal confidential financial data in electronic form since large amounts of equity transactions are being conducted using electronic methods. 3. After reading Patterson’s book, I think that we must neither blindly rely nor randomly criticize the algorithmic or electronic traders. Although Patterson appears to be too critical toward online trading, electronic retailing, etc. (see page nos. 224-230, 273); the author has a scientific basis to question reliability of contemporary equity markets. Otherwise, it is unexplainable that why a critical equity trading platform like NASDAQ is not being maintained carefully enough and it may completely shut down due to even one “connection problem” (Strasburg et al, paragraph 2)! Therefore, the organizations like Securities and Exchange Commission (Bunge et al, paragraph 7) must go ahead promptly as soon as a connection problem is noticed. And for this purpose, independent and dedicated IT teams must be deployed. 4. The overall equity markets situation looks bright simply because USA has been somewhat able to recover from the woes of economic recession that we witnessed in 2008. However, reports from reputed business literature clearly show that serious risks still exist. For example, connectivity problems must not be so acute such that trading is completely halted, as we saw in August 2013. Risks of using IT tools and electronic communication may manifest anytime and computer systems may go down for longer periods causing huge loss of business. Therefore, until independent IT experts are deployed for consistent monitoring and troubleshooting, overall quality of US equity markets will not be optimally improved and deservingly stable. Moreover, the current legal framework of NASDAQ and NYSE operations do not have precise rules specifically designed to regulate the privately held trading systems termed as “dark pools” (Strasburg et al, paragraph 18). For the time being, economic performance of the American equity markets appears to be satisfactory, although its technical situation is full of risks. Works Cited Albinus, Phil. “TOP STORIES 2013: Knight Moves.” Traders Magazine Online News. 2013. Web. 19 February 2014. http://www.tradersmagazine.com/news/top-stories-2013-knight-moves-111846-1.html Bunge, Jacob, Jenny Strasburg, and Scott Patterson. “Nasdaq in Fresh Market Failure.” Wall Street Journal. 2013. Web. 19 February 2014. http://online.wsj.com/news/articles/SB10001424127887324619504579028873794227410 Patterson, Scott. Dark Pools: The Rise of A.I. Trading Machines and the Looming Threat to Wall Street, 2012. New York: Random House. Print. Strasburg, Jenny, Scott Patterson and Jacob Bunge. “Nasdaq Focuses on Pivotal 2 Minutes in Trading Halt.” Wall Street Journal. 2013. Web. 19 February 2014. http://online.wsj.com/news/articles/SB10001424127887324906304579035270873010160 Read More