Computers as innocents: Don't shoot the messenger

Shutting off the potential for arbitrage in such situations is "... like shooting the messenger,'' said Merton H. Miller, a professor of finance at the University of Chicago, to the New York Times on October 22. ''Program trading is just the obvious villain, but it actually brings the futures market into adjustment with the primary stock market in New York.'' In the same article, Leo Melamed, chairman of the executive committee of the Chicago Mercantile Exchange, called program trading a "safety valve." (citation)

The problem wasn't that computers were ordering stocks to be sold on the stock market, but that institutional investors were selling heavily in the Chicago futures market-- a market they knew to be intimately tied to the New York Stock Exchange. In fact, in an article to the Harvard Business Review, Arbel et al suggest that "program trading may have accelerated a process of price adjustment that would and should have been triggered anyway.... Our study suggests that program trading not only did not interfere with market rationality, but actually contributed to market efficiency by speeding up and completing the price adjustment process." (citation)