Art Cashin on How High-Frequency Trading Has Changed Markets

I recently met up with Art Cashin, director of floor operations at UBS and a regular on CNBC for years, on the floor of the New York Stock Exchange.

One of the biggest changes to hit trading in the last decade is the shift from human traders to computers, or high-frequency traders. Computerized trading has turned the Dow Jones (DJINDICES: ^DJI  ) into a jittery mess, causing several plunges over last few years for no apparent reason.

Here's what Cashin had to say about the change (transcript follows):

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Morgan Housel: With the shift away from human traders to high-frequency trading, does that make the market more stable, more prone to volatility? What are the major changes?

Arthur Cashin: Well, you're talking to an old fogey in the business, and having done 50 years, I tend to think that it makes it potentially susceptible to volatility in the sense that you like to have humans in control. I don't think many of the viewers would like to get in an airplane with no pilot in it. The concept of an autopilot is wonderful, but in a stormy sky late in the evening, you like to know that there's some human thought and interaction.

We saw some of that in the now fabled Flash Crash, and luckily because of the human interaction and people questioning, wait a minute. This doesn't look quite right. There's something wrong here. I don't think this person wants to sell this at whatever price. So because of that here on the classic New York Stock Exchange floor, nothing traded at a penny. People stepped in and said, wait a minute. Let's slow it down for a minute. Let's find out what the client really means.

Now this is always a difficult game. As a human trader, you've got to really get a sense of what's going on. If there has been some major event that could cause prices to suddenly turn disruptive, you can't stop completely and independently. You've got to do it within the environment that you see.

So maybe I'm prejudiced in being a human, but I tend to think that having that kind of human interaction benefits. It prevents Chernobyls, financial Chernobyls from happening.


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