Anybody tasked with staring at a Bloomberg terminal on a regular basis inevitably turns their thoughts to the motives of all those unseen investors silently driving markets higher or lower, on a daily basis. Our lizard brains, one suspects, are not well-suited to watching investment markets soar or collapse with exactly clinical detachment. "Fight or flight" does not translate well, or necessarily profitably, to volatile markets in one's pet investment themes. But our hypothetical Bloomberg-watcher, if not ourself, also labours under the fair presumption that there are unseen humans at the other end of those trades. What if they're actually robots ? One of the few, and perhaps only, intelligent insights that John Maynard Keynes made was his comparison of financial market participants with judges in a beauty contest:

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees."

Or in other words, investors tend to spend a good deal of time trying to anticipate the market reactions of other investors - as opposed, say, simply to uncovering objective deep value and sticking with it. So what happens if our putative beauty contest / financial market judges are actually machines? Some sources indicate that high frequency and algorithmic trading (for want of a better short-hand: a bunch of robots) now accounts for three quarters of all US equity trading volume. So our hypothetical Bloomberg-watcher is now trying to assess the extent of greed and / or fear at work in a market that may be devoid of much direct emotional response and is now the plaything of a dispassionate trading algorithm or two. Good luck in trying to understand what R2D2 thinks about the latest unemployment figures.

The human brain has evolved to a high art of pattern recognition. The exquisite irony of our time is that we may be looking for patterns in markets where none really exist - just the vapour trail of C3PO?s latest software instructions.

David Fuller's view I maintain that the HFT robots have increased day-to-day volatility. This is a much bigger problem for traders rather than investors, provided the latter are unleveraged and can develop an emotional and analytical indifference to the volatility.

I commend the rest of this issue to all investors, not least the 'Fooled by Randomness' conclusion.