Well, that's a relief: it's not the machines

David Weidner sort of reviews a book, Inside the Black Box: The Simple Truth About Quantitative Trading by quantitative trading specialist Rishi Narang, in the WSJ, in an article titled Peering into the Black Box .

Mr. Narang is of the opinion that as a whole, quantitative trading and its sub genre, high-frequency trading, are good for the markets. Such trading strategies create liquidity in the markets and -- in the case of high-frequency guys, he argues, can stabilize volatility by providing the other side of the trade.

The problem, of course, is that people have been given new, trading tools of mass destruction. In the right hands, a high-frequency or passive quantitative program can be left running with minimal human interference.

Put those powerful tools in the hands of the less scrupulous, however, and suddenly the rules have changed. Someone is not only playing the game but controlling the roll of the dice. In August, a federal prosecutor asked a judge to put Sergey Aleynikov in jail because the computer code he allegedly stole from Goldman Sachs Group Inc. could be used to "unfairly manipulate" stock prices.

If someone could do it with a few megabytes of code, what's to stop traders at a big brokerage, or a big hedge fund or anyone with real resources from juicing the trading desk even if for a few trades? Stock manipulation is a crime as old as the markets, but have the markets ever seen such a powerful force as a computer that can crunch numbers -- including incoming customer orders -- in milliseconds?

The point is the big trading decisions in all sorts of investing are made by humans, not computers.

"If you leave people to their own devices they often do horrendous things," Mr. Narang said.

Sounds to Guambat like the "guns don't kill" argument.