Now we’ve all heard this statement that time is money, but in some cases, that is literally true. In markets around the world, timing is everything and the smallest fraction of a second can equal millions gained or millions lost.
Could robots run the stock market? It sounds like science fiction, right? Like what are you guys smoking? But it’s not as speculative as you might think, especially when we consider the rise of what’s called high-frequency trading.
How it Works
High-frequency trading depends on algorithms or for those in the industry. They are called “algos” and what they do is execute millions of trades per second, and then they simultaneously look at dozens of public and private markets.
This means that the algorithms can spot trends much more efficiently and accurately, and more quickly than a human investor. So they can execute trades, buy, and sell within milliseconds, so close that it might seem, unless you’re looking very closely, to be a simultaneous event. This weird kind of mathematical magic occurs because these high-frequency traders minimize latency.
Latency is just a fancy word for a delay, there’s a delay in the time between when investor. A buys a stock, and when that trade is actually executed and there, again, within this chasm, maybe not even a full second, millions of trades can occur.
This means that if you are a regular, old school, unfortunately, biological day trader or something, you are on the losing end of what’s called information asymmetry. So the times had this great report a while back about how these high-frequency traders can actually peek at a stock about 3 seconds before your average investor, 3 seconds, again, before a trade is executed. They can swoop in and buy these thing milliseconds beforehand, and that changes the value.
So for a rough analogy, if you’ve ever been trying to buy something online and you are bidding for tickets, you’re on eBay or something and you enter a price, but then the next thing you know, the price that you had agreed to pay is totally irrelevant and the price of the thing has changed. That’s what’s happening, and that’s not all that’s happening. You see, during this process, these traders and these algorithms can ping a stock and what they do when they ping a stock is that they sort of send out a fake bid that they can also cancel to get a read on how much people are willing to pay for this. In the world of high-frequency trading, this is called a flash bid.
Although it is not technically illegal yet, this is another example of something that we have seen cropping up all the time in modern history, and that is that as a species, a human technological ability is outpacing our legislative capacity. There are things that we don’t know how to legislate yet and if you just do a cursory research on high-frequency trading, you will find so many people arguing about what, if anything, we should do to change this, to reduce this inequality of timing and information access, to reduce this information asymmetry, and of course, you’ll find people saying, “No, we shouldn’t, the market will somehow correct itself.
But regardless of what you think about this specifically, there is one thing that is crystal clear, and it is this: the role of human beings in the stock market, insecurities, in commodities, it has profoundly changed, and likely will never be the same again.