The danger of falling too deeply into the thrall of technology is evident in financial markets every day, but that doesn’t mean we should smash the machines. We should be pushing the limits of their potential in useful applications while curbing their excesses.

The so-called “flash crash” back in May 2010 was a vivid demonstration of how far trading has been allowed to drift out of human control. And, in early August, one firm got a near-fatal reminder of how dangerous that can be, when a software glitch caused a $440-million loss at Knight Capital Group Inc., forcing the firm to search out fresh capital to stave off extinction.

As such events show, trading is occurring much faster than we can observe, and algorithms are exploiting otherwise imperceptible arbitrage opportunities. Markets have moved beyond our capacity to understand them, and that is giving rise to new systemic risks. Yet, none of this ultra-fast trading does anything to further the basic market function of efficiently allocating capital.

As the financial crisis demonstrates, systems that blindly privatize gains and socialize risks are bound to end in tears. It’s time that regulators curb these excesses.

At the same time, regulators should remain open to genuine, tech-driven innovation. For example, August brought the news of a Canadian discount broker’s plans to offer automated financial advice to its clients – an effort that regulators are facilitating with regulatory exemptions.

While it’s too early to judge this sort of offering and financial advisors may not welcome the prospect of being replaced by machines, there’s no question that more cost-effective financial advice could be socially beneficial. Governments are actively seeking ways to make useful, basic financial advice more widely available to consumers.

Online financial advice isn’t going to save the world, but it’s an application of technology that’s worth encouraging – even as it’s clearly time to rein in the machines that have risen to dominate the market’s technical trading functions.

© 2012 Investment Executive. All rights reserved.