Published on 03 April 2020


Coronavirus : Rehumanize finance to reprogram high frequency trading

Since February 20th, global markets have dropped an average of 30% due to a massive plummet that was soon followed by a temporary upswing. The cause of these massive fluctuations is High Frequency Trading (HFT), a system controlled by pre-programmed algorithms which overreact to even the slightest negative signal. To remedy this problem, long-term, human analysis must be reintroduced to the financial landscape. All week long, Novethic will examine the fragility of our economic models, sector by sector, in the context of the current health crisis.

Ouverture NYSE bourse coronavirus BryanRSmith AFP 01
Photo taken on March 23rd at the opening of the New York Stock Exchange.

Close monitoring of the recent stock market fluctuations has not been for the faint of heart. They seem to follow the same pattern of ups and downs as end-of-the-year holidays and festivities; rapid descent when one holiday has passed followed by a steady ascent due to the anticipation over a new one. Today, the financial markets are primarily driven by computers and have been programmed to respond to certain stimuli. COVID-19 is not one of them, but is nevertheless, an opportunity to get back to the fundamentals of financial analysis.

The United States has announced a $2 trillion stimulus package, and the NASDAQ rose 13% after weeks in free fall. How will these enormous sums be allocated? Will they be used to bail out large listed companies that have lots trillions in market capitalization, or will they target Americans more directly to power the country’s main engine of growth: consumption? To what extent could this recovery plan help strengthen the health care system which, as it stands, exposes the country to a COVID-19 disaster?

Millions of orders processed every nanosecond

All of these political, environmental, and social issues are of no interest to computer-assisted High Frequency Trading (HFT). HFT represents three-quarters of all market exchanges in the United States, and almost half in Europe. Based on enormous quantities of trades and purchase orders placed every nanosecond on financial markets around the world, the HFT is reserved for immensely powerful players, both financially and technically. HFT requires specific equipment to place huge trade volumes and program complex algorithms that require regular updates.

As the site ABC Bourse explains, pedagogically speaking, the parameters that determine this tool’s firepower are order management and risk management algorithms. "In the first instance, the order placement algorithm is a key point that can make or break the system. Everything relies on how this "black box" is programmed. In the second instance, understanding how to set profit limits and losses is essential".

The black box programming is, therefore, the key to understanding current stock market variations. It is then understood how one of Donald Trump’s tweets can have an immediate impact on the markets while the implementation of a company’s resilient and sustainable strategy will leave the market unmoved. In the first case, the tweet becomes an immediate single sent to billions of servers. In the second case, the company’s strategy involves a medium to long-term strategic plan whose impact analysis is not integrated into the HFT system’s long-term scope (which is currently 24 hours).

A humanless profession

To change the game, it is necessary to reprogram black box trading and reintroduce ESG data. That is to say, the social and environmental impacts of a given activity or service must be measured and over a much longer timeframe. With the current quality of available data, which remain far removed from mathematical models, the only possibility is to restore value in fundamental financial analysis.

This business strategy assessment must be carried out by qualified human beings who are highly trained for this sector. This is not the direction the banking sector was headed before the COVID-19 crisis that caused massive layoffs in Europe, with more than 100,000 jobs lost in recent months.

So that the days to come do not look like the days before, the financial sector must be reconfigured in a way that views human capital as something to preciously preserve and not just an adjustment variable to reduce in times of crisis, even if it means not being strong enough for the next blow; the one where sustainable finance becomes the more resilient, dominant practice.

Anne-Catherine Husson-Traore,  @AC_HT, CEO of Novethic

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