Humans used to execute all stock trades. Actual people coming together face-to-face. Humans are slow, but they can think. That helped alleviate tension when market panics came up.
Then computers came along. Computers are lighting fast, but they can only follow programmed rules, without thought. Problems tend to feed on themselves when computers are in charge. That's been a factor in market volatility over the last decade, as more trading at exchanges like the New York Stock Exchange moved from human interaction to computers.
I recently met up with longtime floor trader Dorren Mogavero at the NYSE. Here's what she had to say about how her job has changed with computer trading (transcript follows):
Doreen Mogavero: Well, I think the function that we perform is still very similar to the one that we always did perform, and that was to keep our customers involved in the market in a very proactive way, not a reactive way. Electronic markets tend to be very reactive. Markets that have people involved tend to be much more proactive, and that sort of mitigates volatility and it also keeps the flow of information going to the customers back and forth in a very real-time way.
Morgan Housel: So with the amount of trading that is now done by computers instead of people, how has that changed the stability and volatility of markets?
Doreen Mogavero: Well as markets have gotten more electronic, they have gotten more volatile, that's definitely, and our market has gotten more volatile as well, but still remains less volatile than a fully electronic one.