Wall Street – Rise of the Machines
In the Terminator movie franchise we get a glimpse of a dystopian future where machines, under the collective control of Skynet, have taken over the world and are at war with what remains of humanity. Without spoiling the series, humans do not get the better end of that deal. Your stock and mutual fund investments are about to get a taste of that future as machines replace the last human traders in the New York Stock Exchange. What could possibly go wrong?
Global Trading Systems LLC (GTS) has agreed to purchase Barclays Plc’s business at the NYSE trading floor, replacing human Designated Market Makers (DMMs) with machines. The deal will complete the shift to automated stock trading that’s been taking place for over a decade.
Humans Under Fire
Back in September the last human DMMs came under fire for how they handled the stock market’s increasingly volatile swings. Reportedly there were times when these DMMs were authorizing trading on stocks to continue without any opening price quote, a situation that went on for days in August of 2015. Stocks were basically trading in the dark, with no price quotes, for nearly a whole week. During those days the entire market NYSE index was basically an estimation. Not having individual share prices rippled through the markets as Exchange Traded Funds (ETFs), which are automated index funds, were trading blind trying to maintain the proper index allotment. This incident marked the point when the NYSE was forced to acknowledge that humans could no longer keep pace in modern markets.
High Speed Traders Rule
The sale of Barclays Plc’s business means that high speed traders now run virtually all of stock trading. This is a good deal for the people running the machines, not such a good deal for everyone else. The big selling point for high-speed trading is that it adds liquidity to the market but, like everything connected to computers, the reality is somewhat illusory. It’s hard to track the value of liquidity when a machine buys a stock at $114.002 and sells it at $114.004 a microsecond later.
Speedy Stealth Corporate Tax
High speed trading also introduces a basic unfairness to the market for those who aren’t trading with high speed computers. Let’s say you put in an order to buy Apple stock at its current price of $93.44. High speed traders can swoop in and bump the price of Apple stock to $93.46, let your trade go through, then immediately sell to see the price drop back to $93.44. Sure, it’s only costing you pennies, but multiply those pennies by tens of thousands of trades every day and you’re looking at some serious money and it’s all coming out of the pockets of small investors.
The Math of Loss
Another advantage high-speed traders enjoy is limiting the downside risk. Since they can make thousands of trades a second, when the market starts to move lower, the machines can instantly unload shares and limit the damage the Math of Loss can do. Here’s how that works: Let’s say you have $100 in stocks and the market loses ten percent. Your stocks are now worth $90. Most people think if the market loses ten percent, it has to gain ten percent to get back even but that’s not how it works. If your stocks are worth $90 and the market gains back the ten percent, you’re only up to $99, not $100. To make up for a ten percent loss, the market actually has to go up over eleven percent! Now you know why limiting losses through high-speed trading is so profitable. When markets crash, their money is already safely in the bank while your retirement goes down the drain.
Is Taxing High Speed Trades the Solution?
Even though the deck is stacked in every way to favor them, if you want to see high-speed traders look panicked, start talking about an idea that’s been discussed for several years: a very small transaction tax, fractions of a penny, to limit such trading. For those of us with 401(k)s and mutual funds such amounts would not be noticeable at our trading volume. But for companies that make thousands of trades every second, churning the market to sift profits into their pockets, such a tax could add up to serious money. Predictably, such trading companies hate the idea, even though it’s been successful in many overseas markets.
Computerized high-speed trading is just another way the stock market is stacked against the little guy and now high-speed traders own the market. When it comes to stocks we, literally, have the problem dictating the solution.
Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.