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The Rise of the Machine Traders and the Rigging of the U.S. Stock Market
Scott Patterson
read on July 1, 2012

I read The Quants (also by Scott Patterson) a few months ago for an MBA class and really enjoyed it again. Pretty much as soon as I finished it up I saw that Patterson had just come out with this book, so I picked it up. This book is about the plumbing of the stock market - the electronic networks that run them behind the scenes - how those networks started, how they matured, and how they've fundamentally changed the nature of stock markets in the last 20 years.

I've read a lot of books on finance - some on stock markets, on hedge funds, on corrupt money managers, on insider trading, market manipulation, ponzi schemes\'85 I'd seen it all. This is the first book I've ever read that actually scared me. It makes me think that maybe I should get my money out of the market, and that the whole thing is just a giant crapshoot/arms race that is going to end horribly.

It's really terrifying what's happening. Market technology is moving forward so quickly now, and it's so far ahead of anyone's ability to regulate it. The markets are essentially run by computers, and it's only a matter of time before they all hit a negative feedback loop at the same time and wipe out the whole damn system.

Anyway - the high frequency stuff was really scary, but there was some pretty interesting chapters on machine learning towards the end. There are AI programs now that run hedge funds. Literally. And these things just watch huge streams of data and try to pickup on trends and correlations and then continuously learn from them. The book focuses on a few cases where the bots played the '08 crises and following rebound perfectly. I need to stress - these aren't human managers whose strategies are influenced by what the machines say is going to happen\'85 these are machines running the whole show. They make the trades autonomously, no human involvement whatsoever. A guy in a suit pretty much just shows up at the end of the month to pickup a fat check. Awesome.

Author Bio:

Scott Patterson is an American financial journalist and bestselling author. He is a staff reporter at The Wall Street Journal and author of Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System and The New York Times bestselling book The Quants.