by the different disciplines. According to the paper by Davis, Kumiega and Vliet (853), the research field should develop a code of ethics that also governs industry and organization wide responsibilities of external participants as well.
Davis, Kumiega and Vliet (856) focus on the high frequency trading part of finance. They argue that finance ethics only relate to those concerned with money management, liquidity provision, market making, and equities and derivative exchanges. Automation has increased the Today, almost every aspect of business is automated. However, automation and finance are governed by different codes of ethics. As a consequence there is a likelihood of conflicting ethical perspectives as would be required scope and nature of harm that is possible for traders. In some cases, errors that would have been prevent through proper quality management systems become the worry of people from another discipline. By so doing, they also increase the risk factor associated with the markets.
Automation is agreeably beneficial for the overall functioning of the markets and the society. It is through automation that high frequency trading is possible. High frequency trading on the other hand is responsible for better price discovery than other non-high frequency trading. It is also useful in attempts at reducing volatility in the markets. It also reduces liquidity and improves the market’s efficiency. Overall, automation is important for increasing liquidity, mitigating volatility and reducing the cost of transactions.
Some arguments hold that automation is not the cause of the woes that it is associated with. Instead, these problems have been associated with high frequency trading arguing that it is the cause of the problems. The argument is that high frequency trading causes the markets to be corrupted. This argument further holds that automation aids in increasing liquidity during normal markets but fails to do the same during extreme events.
Traditionally, trading was done based on human decision making. This has however changed with time. In its place, trading is done with the help of computers. Computers provide the speed and accuracy that would otherwise be impossible to obtain without it. However, there is also a risk that automation at one point or other automation results in mis-approximations (Davis, Kumiega and Vliet 859). Mis-approximations resulting from automated systems may come from bugs, failure to consider possible outcomes and inaccurate models.
Ethics in financial services requires participants to conduct themselves in a diligent, professional, confidential, fair, competent, objective, and honest manner. Traders must also abide by certain regulations in their exchange. The role of automation in the financial discipline provides an opportunity for an ethical perspective that obliges participants beyond their intermediaries and fiduciaries and to include computer engineers, software engineers and financial engineers.
Automated finance enables the creation of a joint relationship between parties from different disciplines. However, there is no responsibility for the actions that take place in this relationship. It is necessary that a code of ethics be formed that offers guidance in the automation of the behavior of the markets. This aspect has remained scarcely studied and requires to be studied on a global perspective since automation enables trading to take place internationally.
An ethical framework is required to help in the regulation of innovation in the industry. Proper study should be done in regard to the financial markets before generating the ethical framework lest it is not done right. With a proper code of ethics to regulate automation, the root causes of innovation breakdowns will be addressed to provide long term solution to them. Quality in regard to automation should be handled professionally, and both at an industry and organizational level (Davis, Kumiega and Vliet 859). The solution cannot be the optimal professional ethics in isolation. The ethical mechanism that is formed should ensure judiciousness while at the same time ensuring that it does curb the independence of each of the trading bodies.
The ethical mechanism that is formed should also seek to resolve the interdisciplinary issues that are expected in the automation era. Ethical solutions should be used in resolving the root causes of issues rather than trying to resolve individual outcomes (Davis, Kumiega and Vliet 863). Through a proper mechanism, risk could be reduced in trading systems that utilize automation. Since the entire finance sector has come to be automated, the ethical perspectives should seek to regulate various sectors of finance including portfolio and risk management.
In conclusion, the automation of every aspect of finance has come with a lot of advantages. However, it has also come with some disadvantages. First, automation remains without a proper code of ethics to regulate it. For this reason, errors originating from areas of automation that would otherwise be regulated remain a big problem in finance. A proper ethical mechanism is required. To provide proper regulation, the mechanism should address multi-disciplinary issues in such a way that the root problems are resolved in the long-term. It should, however, not lead to a situation where the independence of the various institutions is abated. Instead, it should enable a proper co-existence of the various disciplines.
Davis, Michael, Andrew Kumiega, and Ben Van Vliet. “Ethics, Finance, and Automation: A Preliminary Survey of Problems in High Frequency Trading.”Science and engineering ethics 19.3 (2013): 851-874.
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