As long as there have been markets, people have been driven by greed to make irrational investment decisions. When enough people get in on the action, valuations -- the prices of securities -- go haywire, soaring to obscene heights and then crashing in a shower of crushed dreams.
Chasing performance, taking on excessive risk and selling at inopportune times are all as old as capital markets themselves. What is new is the modern regulatory environment and financial innovations such as high-frequency trading. Is today's stock market the same beast it was 20 or 30 years ago? [...]
Advocates or fans of high-frequency trading or automated trading say that it narrows the spreads on investments and provides liquidity to markets, which lowers transaction costs for all investors. Because you have all these computers basically tossing out and canceling trades faster than you can even think, literally, the correct price for a security is discovered quickly.
"With speed involved, there is the ability to deploy large amounts of capital in one direction or another. As information comes into the market, the computers react in a certain way and tend to all go in a direction like a herd to get to the right price that should be reflected by the new information. There's oscillation around the theoretical right price," says Wallace Turbeville, senior fellow at Demos.