University of Houston Finance Professor Craig Pirrong rejected current conjecture that recent market sell-offs are due to technology, such as automated, algorithmic or high-frequency trading.
In a recent blog post, Professor Pirrong addressed concerns that increasing automation is responsible for a lack of liquidity during downturns, stating “by virtually every measure, the increasing automation in markets has led to greater liquidity.” Moreover, he asserted that the fact that market makers pull back from supplying liquidity during downturns is not unique to HFT; according to Professor Pirrong, this occurred in similar downturns “long before markets went electronic.” The same is true for so-called “momentum trading,” which Professor Pirrong said “is something else that long predates the rise of the machines.”
Because stock market movements are often unexplainable, large moves of an adverse nature often result in a “search for villains and scapegoats,” an exercise that, according to Professor Pirrong, is fruitless. He further noted that:
“[t]he bottom line is that the stock market sometimes decline substantially, without any obvious cause. Indeed, the cause(s) of some of the biggest, fastest drops remain elusive decades after they occurred. This is true across virtually every institutional and technological trading environment, making it less likely that any particular selloff is uniquely attributable to a change in technology. Furthermore, large market moves in the absence of any decisive event or piece of news is not inconsistent with market “rationality”, or due to some behavioral anomaly (which is inherently human, by the way).”