| Warp-speed Trades = High-risk Gambling |
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| Tuesday, 01 June 2010 17:49 | |
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If you've read our book,The Big Gamble: Are You Investing or Speculating? or any number of our blog postings here, you already know the main theme: There is no such thing as investing; it's all speculation. To prove that point in our book, we gave examples of every financial market sector imaginable in which people have had their hopes dashed and savings decimated—stocks, bonds, real estate, commodities, etc., you name it; none of them come with guarantees. We still stand behind our statement that it's all speculation, however, with the recent so-called "Flash Crash" of May 6, we're strongly favoring a different label for the stock market: High-risk Gambling. Remember when most of the Wall Street action happened on the floor of the New York Stock Exchange? There was something about those stressed-out guys frantically racing around in colorful jackets, shouting, arms flailing . . . it gave you an odd sense of security that you just might get your fair shake at a fair exchange. But that's all changed. Back in 2005, eighty percent of all trades took place on the NYSE. By 2005, that percentage was down to fifty. Now it's less than twenty-five percent! We're starting to think that maybe the colorful jackets still swarming the exchange floors are just for the benefit of CNN viewers. The vast majority of trades today are just quick blips on a screen generated via a staggering number of banks of computer mainframes. Up to sixty percent of those trades are made by high-frequency traders (HFTs) doing business in what they call "dark pools," out of the public's view. HTFs are playing a high-stakes mathematical game of chess, and the companies you and I buy into are merely their pawns. We've all known that things were happening behind the scenes, but the speed at which the May 6 Flash Crash occurred caught even the most savvy "investors" off guard. When the market suddenly plunged 998-points, it revealed the unsettling scope of HTF trading. These high-frequency traders are not experienced financial analysts with an interest in the intrinsic value of corporations or industries. These are former math whiz kids and computer geeks who view securities trading as a precarious and addicting game of digital stealth. With their computers placed as close to the mainframes as possible (to shave off even a split second of trading time) their mission is to spot any minute discrepancy in the flow of data and be ready to strike. For instance, if they spot a futures contract that's out of sync with the underlying stock, they jump on the trade with lightening speed. Remember, these guys grew up playing computer games. They can multi-task faster than most people can think. When the action is that fast, and the volume is that vast, things are bound to break down. That's what happened on May 6 when 19 billion shares were bought and sold. By comparison, in 1998, three billion shares traded was considered a heavy volume day. And here we are, nearly a month later and the SEC still can't figure out what went wrong on May 6. Does that give you a sense of confidence? With the high level of complexity, speed, and obscurity in today's market, are you willing to go up against the odds? If you're a high-risk gambler, have at it. If not, better take a step back from the action and find another way to manage and grow your hard-earned money. |
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