The market has no fear, it has no remorse, it will not stop. Does that phrase sound familiar?? It should do, as it’s a straight steal from James Cameron’s Terminator script.
If you fight the market, just like if you take on a robotic killer from the future, you will most likely end up the loser.
In the same way as if you had a tennis match against Federer for money, when trading against the titans of Wall Street, your chances of winning are zero.
People want to trade the market and win, even if it is as hard to survive as a day trader, as it is to be John Conner or a sap with a tennis racket going into the centre court.
Yet this is nothing new. It was nigh impossible a hundred years ago when Jessie Livermore was about trading the bucket shops, it was nearly impossible in the 1950s when Nicolas Davas was around.
Are there any survivors from the happy trading days of the dotcom boom? Where are the customers yachts was the question asked about trading in the 1930. Where are the yachts today?
So what exactly is the issue with High Frequency Trading? When did traders no lose their shirts? Did they lose them in a fairer way? Did they lose them slower?
At worse all HFT’s do is hurt other HFT’s or people who want to hurt HFT’s, by beating the market.
The investor is not affected.
Imagine a market where people only bought stocks for the long term, holding on average for a couple of years. This market has no one trading. How exactly would an HFT trading bot hurt these investors?
The HFTs could play their penny grabbing tricks of course and perhaps grab some pennies from the investor, but the investor is hardly going to lose much sleep over that, they are not trading for pennies, they are investing for dollars. A penny here or there is trivial to an investor.
The lost pennies are important for the short term, short life traders who throw thousands of dollars into the market to capture a handful of pennies in return, the kind of trader who’s financial bones have littered the markets since time immemorial.
Others worry not for the “short life” traders but for the soundness of the market. Here again the system is historically littered with crashes caused by malfunctions most of which have nothing to do with robots, but with the fat fingers of humans.
Intense market watchers will have seen hundreds, perhaps thousands of human errors, spike and crash the markets over the years. The market takes care of these glitches but punishing the perpetrators harshly.
Knights can lose hundreds of millions in minutes with a robot trader, but human rogue traders lose billions. It rogue humans from Madoff to Kervial to Leeson.
It is the human folly of the likes of Lehman, Enron and the legion of financial train wrecks that cause financial meltdowns not the computers. It is the loss of confidence caused by outrages like vanishing client funds at MF Global’s and Peregrine Financial that are a threat private investor confidence, not HFT Snafus.
Of course that doesn’t mean the regulators shouldn’t put in fire walls to protect from “fat fingers” of all kinds. It is a classic regulatory failing that circuit breakers hadn’t been put in earlier or that there are not more kinds of circuit breakers in place today.
Giving HFT ‘algos’ the thumbs up, does not mean the regulators shouldn’t make sure the system is protected from stupidity and malice.
Trying to turn back the clock is no solution. The pace of change in the market is only going to accelerate.
The concern should be that the regulators have been too slow to shut down issues like “flash orders.” It is not that computer trading should go slower but that the regulators need to go faster.
When it’s down to money, can be cheated at any speed and you can make huge mistakes by pen, ink and mail.
There is nothing intrinsically bad about high speed or high frequency if the market is protected from abuse and malfunction.
HFT robots are not bad for the market, they are only hard on the markets inveterate victim; the high frequency trading human. For the investor, the HFT is always there to help their take their profits or cut their losses with ease.
Gold has been going nowhere fast. That looks harsh for the gold believers, but if you are not a “gold bug” the performance is impressive as it clearly underlines Gold is worth $1600 an ounce and its rally to these levels is not a one off spike like so many commodity bubbles. Gold will likely sit at these levels until Germany gets on board in the rescue of the Euro. So if the Euro begins to tumble then Gold will start to rally. Likewise if the US starts to get inflation the gold will rally hard. There is another place to watch for a gold rally: China. Currently China is in a slump because the government is choking a property boom with tight money. When China goes for monetary growth again, Gold will rise.
As such Europe, China and the US are likely to spark a Gold rally sometime in the next year, so no wonder that Gold is holding up.
Bulls make the real money in the market. There are 100 billionaires who are bulls for every billionaire that made their money from being pessimistic.
Unless you are a hedge fund manager like Paulson who made his fortune shorting then there are not that many opportunities to get rich by being doom laden.
As such I’ve decided to look on the bright side and the market has been making me fat profits in the weeks since I’ve decided to stop cursing the fools who have tipped us all in a ditch.
I’m trying to keep it simple.
The west is getting poorer fast.
Wait.
No, the developing world is getting richer fast, we are simply treading water.
We are of course used to being infinitely richer than the developing world, but that is going away.
They will soon have more than just the food and medicine to keep them alive, they will be living in nice houses with all the modern toys that people in the West take for granted.
That will be a shock to many in the first world because they are used to going to foreign lands and lording it over the locals. When the locals suddenly look to have a nicer life than them, it might come as a blow to the ego, but it will be good news for humanity.
I have been getting peeved because the old world has been constricting opportunity in developed countries by punishing success and underwriting failure. This is hardly a formula for producing a dynamic economy. But I’ve decided that the first world is getting what it wants and it leaves the door open for societies that need to grow to explode from poverty.
So a socialised first world lets a capitalist developing world catch up. Hurrah! Suffering a little recession for a decade or two is a small price to pay to give billions of people to catch up with the pampered 1st world.
What is more for a couple of hundred dollars I can jump a plane and go play in the global economy; there is nothing to stop me from taking my skills to where the action is.
Even the US market is only 5% of the potential customers out there and even measured by GDP the US is only a quarter of the pie.
Right now there are rallying stock markets, in the Philippines for instance and Indonesia but it’s easy to not go looking. It’s so easy in fact to spend too much time looking down at one’s economic shoes to not realise the US and UK market has had a heavy rally.
The developed world is bound together in economic lock step. The underlying forces are the same, trade deficit, fiscal deficit and socio-economic stagnation. They are the creditor countries. The debtors countries are bound together redistributing the western wealth to their peoples. They will meet in the middle somewhere as technology raises all.
So the platform for success in the coming years is to be bullish, because there is always an economic party going on somewhere and the strategy is to be part of it.