Technological innovation comes with huge risks in financial markets

 

Financial markets have greatly improved over the past quarter century. Trading costs, whether for small individual investors or large institutional investors, have declined sharply. The cuts going to middlemen are smaller, and many markets are deeper and more liquid than ever. Most of the time.

Unfortunately, the improved markets also are more prone to disaster. The same computerisation and increased competition that provided the benefits also weeded out people who had the obligation to step up in times of stress, and virtually eliminated the ability of people and institutions to slow or halt markets when something goes badly wrong. And with technological innovation continuing apace, the risks may have increased.

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