Let’s start with this admission: I love the markets precisely because of the technological advantages we have. I truly believe we live in a golden age of investing because we now have access and information that before were only the purview of the elite and very wealthy.
Using E Trade (NASDAQ:ETFC) or Charles Schwab (NYSE:SCHW) apps to trade from the beach on your smartphone? Getting instant info from Google (NASDAQ:GOOG) searches, or statistics in one click from Yahoo (NASDAQ:YHOO) and its finance portal? StockTwits? FRED?
Investing in 2012 is awesome.
Unfortunately, when Wall Street talks about deploying drones over the Atlantic to shave milliseconds off trade times, you figure out fast that technology has its downsides, too.
Wired recently took a spooky look at the way technology is supplanting research as the tool used by Wall Street, unearthing a scheme to plant drones over the ocean to speed transmission time on trades by fractions of a second.
Seriously. High-frequency trading is that lucrative that this is the technological arms race we must endure on Wall Street.
High-frequency trading should be part of investors’ vernacular these days. But if not, let me catch you up to speed on some of highlights of this trading-by-algorithm phenomenon.
- Most recently, on Aug. 2, Knight Capital Group (NYSE:KGC) burned $440 million in a half-hour thanks to a trading “glitch.” While not as ugly and widespread as the May 6, 2010, “flash crash,” it was perhaps even more high-profile since HFT was now on many critics’ radar.
- An estimated 95% to 98% of orders submitted by high-speed traders are canceled, according to Tabb Group data published in the Wall Street Journal. The computers are literally clogging the trading queue with orders.
- Haim Bodek, a former head of electronic volatility trading at UBS (NYSE:UBS), has even admitted that high-frequency trading is “predatory.”
Broadly speaking, the complaints are that high-frequency trading is unfair to retail investors and that the risks posed by computer-driven action threaten to cause significant loses to all market participants if the robots go on the fritz again as they have in the past.
The New York Times actually has a great column that asserts “countries around the globe are now using America as a model for what they don’t want to look like.”
So is the investing community finally getting wise to the problem — or more importantly, have regulators finally decided to do something about this mess?
It seems so.
The SEC just hosted a meeting to talk about ways to limit problems. Meanwhile, there also was a Senate hearing last week, and a recent report by the Federal Reserve Bank of Chicago highlighted the very real concerns of market participants.
Meanwhile, overseas the European Parliament voted Wednesday to delay HFT orders by a half-second — a negligible amount to us human investors, but a huge disadvantage to the algorithms. This after Germany moved forward with legislation of its own regarding Deutsche Boerse trading.
The tide seems, thankfully, to have turned against the machines.
However, the real question is how long regulators will take to catch up, and how fast the Wall Street technology game will change and evolve into something different.
- This handy guide in plain English to HFT is required reading. (Business Insider)
- Also informative: A great whiteboard video from Paddy Hirsch. (Marketplace)
- In the interest of balance, here’s a trader who thinks speedy trades are good for the market. (USA TODAY)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via@JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.