This week there has been a high amount of market dislocation with the usual number of aggressive sell-offs in the Dow, S&P 500 and Nasdaq. According to comments by experts, the amount of volume that is controlled by machines is approximately 80 percent. These machines are programmed to act on specific data releases and the trading seems to be reactionary. This type of trading is called algo trading and is now more visible, especially in October, November and December of this year. So now with 80 percent of daily moves being machine-led, these algo or algorithim trading systems, which are advanced mathematical models that help make high-speed trading decision, are used by a wide range of market participants both big and small.
With impact of these algo trading systems becoming more visible, it seems that markets are becoming more reactionary and in the case of sell-offs like we saw recently, volume tends to spike at key inflection points. There are clearly some algorithrms that are similar as the stock moves and selling is more visible and is concentrated at specific levels. One can see key levels breaking and concentrated selling at these levels, much like everyone running for the exit at the same time. The ferociousness of the intra-day sell-offs was apparent in the December 5 and 6 sell-offs as automatic algorithms pounced on the market with waves of selling volume as markets broke down with shocking speed. Overreactions, reactions, and shocks are now the norm in equity trading as a result.