It is widely believed that it is inevitable that technology will assume more control of the decision making in markets, but I for one, hope it does not, for I don’t believe the outcome would be particularly good. At the moment technology dominates the execution of strategies, but the decision making is still a more balanced process with the human very much involved – which to me is a good, because what we need is a good blend of human and machine if we are to continue to see risk takers.

I raise this following a live experiment I conducted during a Dealing Simulation Course in London the week before last, where, for the first time, we simulated a flash crash.

There was nothing too sophisticated about what happened, I wanted to test the mettle of a group of people starting out in the industry to see what they would do and the results were, I suspect, similar to what would happen in real life.

Our pricing algo on the ECN was given repeatedly and liquidity dried up, and as such the price just kept going lower, in all it fell about 400 points. Liquidity via the voice channel dried up totally, which was not a surprise given all I could hear from the teams involved was “what’s going on?” and “Look at that!” In other words, they were awestruck by such a sudden and sharp move.

Presumably the pricing engine and execution algos if we had them (we don’t on the course, it’s about learning, not pressing a button) would just have continued to go lower, as we have witnessed in several flash events in the real world, but what we saw was the human instinct cut in, because about a minute and 400 points into the flash crash, one team started putting bids in and taking advantage.

I should stress the people concerned had no dealing experience prior to the course so this was as close to a natural reaction as could be imagined. These bids stopped the selling and very quickly the market rebounded the 400 points and everyone was looking at each other asking, “did that just happen?”

I asked the team concerned after the session why they did what they did and received a very rational answer – there was no news to suggest such a move should occur, no economic data had been released in the previous hour (or was due), volumes were very light, meaning relatively small amounts were pushing the market, and, I am proud to report, they thought “it was worth the risk”.

This, in a very basic, ground level (in terms of market experience) example, is why the FX market – all markets actually – need risk takers and humans. To a computer there was no logic in buying just 400 points lower, therefore while it may not have sold aggressively; as we have seen in the flash events elsewhere it would just step aside. Meaning other, less sophisticated algos will drive the action (and it would be remiss to ignore the role that humans can play in a panic situation).

By having a risk taker in place, happy to assess conditions and then make what would seem to logical thinkers an irrational or overly risky decision, a flash event was more manageable. Rather than a 10 or more big figure move, we had four – not great I suppose, but a sight deal better than it could have been.

To me, this very unscientific experiment highlights the need for risk takers and also, into the bargain, provides an explanation to more and more people that come into the industry who ask in wonder how the “barrow boys” in London and boys from the Bronx in New York (general euphemisms for people with limited educational achievements for those who don’t know) managed to build a career in markets in the 1980s. The simple fact of the matter was they were risk takers and they learned very quickly how to take risk proportionately or they had no career.

There were times when a bank’s graduate programme involved taking the people with the highest degrees from the best universities, no matter what subject matter that degree was in – and I can attest that law graduates in particular are hopeless risk takers because they want 100% of the information before acting! 

That has thankfully changed and institutions now seek people with the right character as well as the ability to learn and apply complex techniques to everyday issues, but I do sometimes wonder if we have gone a little too far and ignored the value of a risk taker. 

Obviously there have been issues in the industry that have served to dampen this appetite for risk, but the time has surely come to reconsider the value of the role? I think it has, for while I have been espousing the example of a team at the course taking risk and succeeding, I should point out that every other team did nothing.

Risk takers are important, but as this experiment shows they are thin on the ground. I think it is beholden upon the financial industry – particularly the banks – to ensure resources don’t get any thinner.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Profit & Loss

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