How Speed Traders are changing Wall Street an Update

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How Speed Trading has changed the landscape of Wall Street and World Markets

The old expression of “The early bird gets the worm” does not apply any more, because computers never sleep, and they only execute on the orders that are programmed into them.

And today the art of buying and selling stocks and bonds do not happen every moment, but they are happening on a millisecond basis. Data Centre optimization and the technology to connect to them faster than ever has been spiraling out of control lately.

high frequency tradingCompanies are spending tens of millions of dollars to be able to have quicker connections with the computers that sit on their desks, to the computers that make the trades. And we are not speaking of trade times that are a few minutes faster, or a few seconds faster, we are talking about trades that happen milliseconds faster.

Read a blog I wrote about almost 3 years ago on this very topic. When the article was written almost 65% of trades were being done by high frequency trading, it has now been estimated at the beginning of 2014 over 85% of all stock trades are done by computers.

High Frequency Trading
Nasdaq started Electronic Trading
London Stock Exchange started Electronic Trading
Toronto Stock Exchange started Electronic Trading

It may surprise you to know that most of the stocks that are traded in Canada, the US and around the world are not traded by human beings anymore, but by Super Computers running finely tuned algorithms.

stock exchangeGone are the days that  traders stand on the floor of the exchange and make trades amongst each other to buy and sell stocks of companies. Many years ago, the historic move by the NYSE to remove traders from the floor was the beginning of the conversion from human to Super Computer.

It is estimated that over 65% of the stocks traded every day are done by computers, with little to no human interaction. The purpose of these large trading systems, are to capitalize on small movements and triggers set by mathematical geniuses employed by the major trading houses and banks. Each trading house has their own set of queries and qualifications to buy and sell stocks by the thousands on a millisecond basis.

These supercomputers – which actually decide which stocks to buy and sell – are operating on highly secret instructions programmed into them by math wizards who may or may not know anything about the value of the companies that are being traded.

This is a very serious erosion of stock fundamentals, where traditional trading was based upon the fundamentals of a company, or the future potential of either a product, its management team or the opportunity for growth for which we had initially looked to Bay street to provide for us.

Where did all the floor traders go?

stock trading floorToday it is still the public fa├žade of Wall Street, and a television backdrop for reporters relaying financial news. But less than 30 percent of the trading is conducted there now, and the specialists and the noise of the floor is being replaced by the speed and quiet efficiency of computers, and the action has moved elsewhere.

Which takes us back to the mini crash on May 6, and one of the scariest rides in stock market history when the Dow Industrials at one point plunged 600 points for no apparent reason.

Turns out it was triggered when a mutual fund’s computer dumped $4.1 billion of securities on the market in a 20-minute period, which were then gobbled up by the computers of high frequency traders and sold almost immediately, sending other computers and traders heading for the exits.

It is very scary these days, that the whole fundamentals of trading have now been offloaded to a group of mathematicians, instead of traditional fund managers who are paid very handsomely to be able to predict the movement and opportunities of the individual companies that it manages.

If it is a computer that is doing the moment to moment trading action of the stock markets, why are the CEO’s still getting their million dollar bonuses? Shouldn’t it be the computer who gets the pat on the head, and redistribute the CEO’s Bonus back to the shareholders? Just my two cents…

Originally posted by Steffen deGraaf