Hold Your Horses, ChatGPT: We’re Not Quite Ready To Kick Humans Out of Stock Trading!
Yeah, okay, artificial intelligence has been poking its nose and all those fancy algorithms into just about every industry. But, hear this: recent research shows when it comes to stock trading, robots can’t hold a candle to good ol’ fashion human interaction.
A Big Kudos To Team Human in The Stock Trading Game
Here’s the gist. A study from the brains at the University of Utah and the State University of New York at Buffalo puts the spotlight on human superiority, at least in the stock market arena. It turns out teams of humans collaborating in person still beat out the computerized competition.
You know those movies where traders are on the floor making deals with hand signals (or shouting loud enough to make your ears ring)? Yep, folks, these floor brokers and their buddies, the Designated Market Makers (DMMs), are still in the game providing liquidity and managing auctions. Who’d have thought?
A Plot Twist courtesy of the Pandemic
The silver lining in the COVID-19 pandemic cloud? It was the perfect set-up for this research to kick-off. Lockdowns forced the New York Stock Exchange – the last major American stock exchange to keep human floor traders – to shut its floor and migrate trading to electronic and algorithmic systems.
Meticulous researchers, as they are, decided to compare NYSE’s performance before and after this sudden transition to fully electronic trading. Talk about a unique comparison opportunity!
Jumping Into The Research Rabbit Hole
Lo and behold! The data shows trusty humans handled trading tasks more effectively than those pesky automated systems.
Hear me out on this one. There’s this thing called price efficiency – how well buyers and sellers agree on a stock’s price based on available public info. Perfect price efficiency means folks agree on what a stock is worth, while more pricing errors signal inefficiency.
No surprise here, without human traders in the mix, pricing errors escalated by 2% to 6%. In layman’s terms, efficiency started circling the drain when trading was left entirely to machines.
That’s not all. Also, liquidity took a nosedive when human intervention was put on hold, as measured by a thing called the proportional spread – the difference between a stock’s bid and ask prices. Bigger spreads translate to lower liquidity, and you guessed it, investors coughing up more for trades.
If electronic boffins could completely replace human DMMs, then the spreads should’ve stayed the same or even narrowed. But, alas, our human friends consistently helped keep spreads – and trading costs – lower. You see where this is going, right?
In a world head-over-heels with AI advancements and eager firms pumping money into automation, here’s the fun twist – human expertise still routinely outshines automatic processes when it comes to trading. Well then!
What Does It Mean For The Big Guns, And Maybe Even You?
If machines replacing us is keeping you up at night, here’s some comfort food – they might not be the be-all and end-all solution, at least in the stock trading game. Co-author Domink Rösch waves the flag here, pointing out how algorithms trip when replacing humans in complex maneuvers.
So, on that optimistic note, there’s still hope for us to hold onto our jobs – including the jobs of you traders out there. Cheers to that!
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