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Algorithms Out of Control?

Traders Magazine, March 2005

Nina Mehta

Progress always has its downside. Algorithms, when used properly, indisputably reduce transaction costs. These mathematical marvels can lead to better executions. However, flawed algorithms - in a nightmare example of math made too simple - can also be read by trading sharpies. They can read the patterns of some algorithms and front run. "There's a lot of fear that reverse-engineering and pennying problems are causing people using algorithms to incur greater costs than they normally would," says Ben Sylvester, senior trader at money manager David L. Babson & Co. "You have to be cautious about how you use algorithms." However, the algorithms of recent times are not an accident. They are a

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