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A rush into algorithmic trading is setting up a concentration of faith in computerized investment, a trend that could backfire in intensified volatility and lowered returns.

What's going on: By 2025, Wall Street firms are expected to shed 10% of their work force — 230,000 jobs — as they embrace intelligent algorithms, trading that relies on crunching mountains of data and sometimes anticipating the actions of human traders (see chart, below), according to the financial consultancy Opimas.

Expand chart
Data: Opimas; Chart: Andrew Witherspoon / Axios
  • Such trading is soaring: Quantitative hedge funds, or quants, doubled their share of U.S. stock trades to 27% from 2013 to 2016, and are now just under the 29% carried out by individual investors, the WSJ reports.
  • The leading edge of this movement uses machine learning, programs that write their own algorithms for use in trading. Humans continue to play a role in all of these trades.
  • But results can tend to decay: Programs inadvertently converge on the same strategies, engaging in algorithmic group think. When that happens, returns fall.

These trends are visible in other data: A recent J.P. Morgan analysis showed that 60% of all equity assets are now owned by passive investors (think index and exchange-traded funds) or quantitative funds, double the less than 30% that they held 10 years ago.

Why to worry: There is evidence that as more and more algorithms are employed to find inefficiencies in the market, their tendency to arrive at similar conclusions puts the market at risk of dangerous swings in asset prices.

  • Humans strike back: Though the returns for traditional Wall Street methods like the analysis of corporate fundamentals and economic trends are falling, asset managers are finding ways to adapt. Big hedge funds like SAC Capital and Tudor Investment have been hiring algorithmic trading experts, while startups like financial-data platform Elsen are offering services that help smaller money managers do traditional data crunching more efficiently and take advantage of machine learning technology to supplement their insights.

Go deeper

Scoop: Ukraine gives U.S. senators specific asks on Russia sanctions, military aid

Zelensky. Photo: John Thys/AFP via Getty Images

The chairman of Ukraine's parliament has sent a letter to eight U.S. senators outlining four specific requests for security assistance and sanctions that Kyiv believes will help deter a Russian invasion, Axios has learned.

Why it matters: The Ukrainian government is leaning on Congress — and a bipartisan group of senators negotiating compromise language on sanctions that could pass the Senate — in an effort to push the U.S. posture beyond the Biden administration's approach.

Updated 1 hour ago - Energy & Environment

Bomb cyclone prompts blizzard warnings from Virginia to Maine

Computer model projection showing the intense storm off of Cape Cod on Jan 29, 2022, with heavy snow and strong winds lashing the coastline. (Weatherbell.com)

Blizzard warnings are in effect for 11 million people from coastal Virginia to eastern Maine as a powerful and potentially historic winter storm is set to slam the Mid-Atlantic and Northeast beginning Friday.

Why it matters: The storm will bring an array of hazards, from zero visibility amid hurricane force wind gusts and heavy snow to coastal flooding that will erode vulnerable beaches and threaten coastal property from the Jersey shore to coastal Massachusetts.

Republican-led Pennsylvania court deems mail-in voting law unconstitutional

Workers count ballots for the 2020 Presidential election at the Philadelphia Convention Center in Philadelphia, Pennsylvania, U.S., on Nov. 3, 2020. Photo: Hannah Yoon/Bloomberg via Getty Images

A Republican-led Pennsylvania court on Friday ruled that the state's mail-in voting law is unconstitutional.

Driving the news: Three Republican judges sided with Republican challengers and ruled that no-excuse mail-in voting is prohibited under the state's constitution. Two Democrats on the panel dissented.