Self-driving finance could turn into a runaway train

The mysteries of bitcoin are turning heads yet again this week. At the start of the year, the digital token was worth $1,000; on Thursday, it breached$16,000. This is eye-popping, particularly given that so few investors actually understand how cryptocurrencies really work.

But amid this frenzy, here is a more startling idea to ponder: what is happening with bitcoin is not actually the most head-spinning technological development in finance today. Far from it. Away from the public gaze, there are a host of other digital innovations emerging that have attracted little public attention, yet have more far-reaching implications.

Consider the structure of markets. A few decades ago, most investors assumed that markets were a place where human brokers traded securities, on behalf of flesh-and-blood investors, driven by strategies devised in their brains (or investment committees).

But today that idea is as quaint as assuming that currencies are controlled by a central bank. Marko Kolanovic, a JPMorgan analyst, estimates that a mere 10 per cent of US equity market trading is actually now conducted by discretionary human traders; the rest is driven by various rules-based automatic investment systems, ranging from exchange traded funds to computerised high-speed trading programs.

Of course humans write this code, and sometimes oversee trades. But at a recent financial technology conference at Michigan Law School, regulators and academics estimated that computers are now generating around 50-70 per cent of trading in equity markets, 60 per cent of futures and more than 50 per cent of treasuries. Increasingly, machine learning and artificial intelligence are being added to the mix, to analyse data, trade securities and offer investment advice.

What we are seeing, in other words, is the rise of self-driving investment vehicles, matching the auto world. But while the sight of driverless cars on the roads has sparked public debate and scrutiny, that has not occurred with self-driving finance.

This needs to change. Theoretically, digital finance could deliver huge benefits. As the Basel-based Financial Stability Board noted in a report last month, computers trade faster and more accurately than humans, and analyse bigger volumes of data to exploit price differentials.