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

Susan Collins says Senate should postpone Supreme Court vote

Sen. Susan Collins. Photo: Tom Williams/Getty Images

Sen. Susan Collins (R-Maine) said in a statement Saturday she believes whoever is elected in the 2020 presidential race should pick the nominee to fill Justice Ruth Bader Ginsburg's Supreme Court seat.

Why it matters: Collins will be key in how the nomination process plays out. As one of the most centrist Senate Republicans, whether or not the Senate confirms Trump's SCOTUS nominee could hinge on her vote.

Updated 1 hour ago - Politics & Policy

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Global: Total confirmed cases as of 4:15 p.m. ET: 30,602,281 — Total deaths: 953,591— Total recoveries: 20,833,568Map.
  2. U.S.: Total confirmed cases as of 4:15 p.m. ET: 6,751,119 — Total deaths: 198,969 — Total recoveries: 2,556,465 — Total tests: 93,150,052Map.
  3. Politics: In reversal, CDC again recommends coronavirus testing for asymptomatic people.
  4. Health: The dwindling chances of eliminating COVID-19.
  5. World: Guatemalan president tests positive for COVID-19 — The countries painting their pandemic recoveries green.
Ben Geman, author of Generate
2 hours ago - Politics & Policy

The new politics of global warming

Photo illustration: Sarah Grillo/Axios. Getty Images photos: Ethan Miller and Chip Somodevilla

The 2020 election is both very different and very familiar when it comes to the politics of global warming and the stakes of the outcome.

What's new: Democratic voters are more concerned than in prior presidential cycles, polling shows.