Smart Trades, Bad Investments, and the Unknown

Wall Street and technology have long been the ultimate power couple. Software and hardware improvements let traders slice and aggregate orders more easily than ever. Many trading algorithms are designed to approximate, and perhaps beat, the volume-weighted average price of a stock, the execution benchmark to which traders are often compared. Much has been made of high-frequency trading,⁴ dark pools,⁵ and various other technological innovations designed to empower institutions with computerized market access that would have been unimaginable not long ago. Academics have varying opinions on whether these resources, in the aggregate, make the markets better or worse for the average investor.

But all of this stuff only targets the “known unknowns,” a concept popularized by Donald Rumsfeld. As a buyer of a stock trying to get the best price, you don’t know exactly what the sellers out there have, but you know you don’t know that. So you invest heavily in technology in an attempt to decipher what the sellers’ actions suggest they have, and to minimize your exposure in case you’re wrong.