Читать книгу Ignore the Hype - Brian Perry - Страница 20

The Change: Recent years have witnessed the rise of machines in the financial markets. High-frequency trading firms utilize algorithms to facilitate buy and sell orders. These algorithms then seek out the best pricing, often leaping ahead of orders entered by or for individual investors. Time is of the essence for high-frequency traders, to such a degree that many firms have installed their own fiber optic cables and located their offices in geographic proximity to major exchanges in the hope of shaving nanoseconds off of their trade execution times.

The consequence of this is that high-frequency traders now dominate trading activity in many markets while their use of technology allows them to profit nearly instantaneously from incremental price changes.

I am not 100% confident in the exact source of these specific numbers i had been using so i want to make this more general. This paragraph should now read: “While exact numbers are difficult to determine, some researchers estimate that more than half of all trading in U.S. stock and futures markets is originated by high frequency trading firms and other algorithmic traders.”

This rapid turnover has been blamed for an increase in market volatility, though studies have proven inconclusive, in large part because high-frequency trading firms are reluctant to share the data behind their trading. Nonetheless, it does seem reasonable that a significant increase in turnover from firms interested in profiting from tiny price differentials in various securities (as opposed to the fundamental value of a good business) could lead to larger price fluctuations.

The impact of high-frequency traders inserting themselves in the middle of trades executed by other investors has also been viewed as an additional expense investors pay when executing their orders. To a degree, this can offset some of the price advantages individuals have received from the lower transaction costs previously discussed.

The Impact: Raise your hand if you measure your trade execution times in nanoseconds.

Me neither.

Simply put, just as in the Terminator movies, there is no way for the average individual to compete with the rise of the machines. And unlike many of the other evolutions described in this chapter, there is no positive impact I can find from this development. High-frequency trading is, at least in my opinion, unequivocally bad for anyone not engaged in the practice. After all, high-frequency trading firms exist to make money for themselves, and their profits come directly from the pockets of other investors. As such, high-frequency traders are the financial market equivalent of toll collectors.

So, what's an individual to do? My advice is to not even try to compete. Investing and trading are inherently different activities. Traders are at risk of losing out, with a share of their profits being sucked away by the high-frequency firms.

Investors, with their longer-term time horizons, should find their holding period returns relatively unaffected by the high-frequency traders exacting their pound of flesh from each and every transaction, which is yet another argument in favor of adopting an investing, as opposed to a trading, approach.