There needs to be made a distinction, between Algorithmic Trading and electronic execution systems.

The first important difference is the brains behind the two systems. While neither can be considered dumb, the HFT Market Makers of the world have invested heavily in smart people and smart systems, while the mutual fund community has been happy to auto execute and complain to regulators about Algo’s.
 

The second distinction is the purpose of each group. Electronic execution systems exist for entry and exit of securities position. Money inflows drive buying and money outflows drives selling. It is a simple process of following the instructions of clients and fund investment guidelines.
 

Algo trading systems are nothing more than market makers. Indeed they are brilliant, front running orders from funds and improving their levels of market making.  But, the competition between  algo Armies, makes it more difficult for one algo to dominate.  Being the rogue bad guy is a dangerous business.

Their main goal is market making, and going home flat.
 

So when we accuse Algo’s of increasing volatility, we need to pinpoint the true culprit. Carl Icahn, blames passive investing for recent volatile equity swings.
"Passive investing is the bubble right now, and that's a great danger"  
 

In conclusion, this is how I see this playing out.
Passive investment firms will improve their electronic execution systems and alter client holding periods, which together will lessen the volatility of entry and exiting positions.
Algo market making firms will continue to spend heavily on the best new technology, designed to make markets, which will also constrain volatility.
When we return to normal volatility levels, which we always seem to do, I would expect the downward pressure to be more forceful than ever.
 

Skewviews, LLC is a registered investment advisor.
This is not a recommendation to buy or sell any securities.
Visit www.skewviews.com for more information about our firm
email info@skewviews.com