Colin Read: History of Algorithmic Trading Shows Promise and Perils

Colin Read is chairman of the finance department at the State University of New York, Plattsburgh. He is the author of the “Great Minds in Finance” series and other finance titles published by Palgrave MacMillan.

When machines replace seasoned traders and market makers, mistakes can occur at dizzying speed.

It happened with the notorious “flash crash” on May 6, 2010, and again on Aug. 1 this year, when software at Knight Capital Group Inc. (KCG) malfunctioned, triggering unintended trades and leading to a $440 million loss for the company.

Ironically, Knight Capital Group was originally known as a market maker, with trading specialists who oversaw trades on each side of a security to ensure the market functioned in an orderly and efficient manner. The company’s troubles once again show the extent to which Wall Street now relies on algorithmic programs to execute its trades, for better or worse.

Although many in the financial world have expressed concerns that a new era of automated finance is destabilizing the markets, algorithmic trading isn’t new -- it’s almost as old as computers themselves....