Do Any Of Us Have A Chance In The Stock Market?

Ever since the ‘flash crash’ in May, where the markets dropped 10% in a matter of minutes only to recover most of it back in just a sudden fashion, I’ve been spending a little more time watching and understanding the market.

What I have found I don’t like.

It seems that computerized trading has taken over the market.  In fact, this computerized trading is blamed for the ‘flash crash’.

It also seems that computerized trading is responsible for most of the trading activity that exists.  So, when you look at the volume of shares traded across a market like the Dow or Nasdaq, chances are most of the billions of shares traded are not done so by humans, but rather by computers.

It turns out that many of the large investment houses have set up computers, with super duper secret algorithms, that perform many of the trades that take place.

I’m not sure how I feel about it.  Actually, I am.

I don’t like it.

It seems that there are a lot more shares controlled by computers than there are controlled by anybody that’s actually watching things.  While there is someone in the background entering the algorithms or kicking off a trading program, it still means that there are traders out there who basically control the market.

This concerns me a great deal.  I think the thought of exchanges being handled by barking out orders and holding tickets are long gone.  Those days are behind us.  It’s all done now with the hum of a computer.  The quiet hum of a computer and a couple of clicks can cause just as much frantic activity as used to take place with a lot of shouting, pushing, and excitement.

I don’t know about you, but that scares me.  It makes me think that there isn’t much hope for those trying to make money in the stock market, especially when you consider things like broker transfer fees and other costs that whittle away at your money, on top of all the jobbing done by the computers.  It certainly doesn’t bode well for the ‘buy and hold’ investment strategy, the same one that we were told time and time again would bring us out ahead in the end.  After all, if I play chess against a computer, chances are the only way I’m going to win a majority of the time is to set it on ‘easy mode’.  Can we really play ‘trading’ against these computers and hope to win?

Because I don’t think there are any of these computers set to ‘easy mode’.  That’s one thing I’m sure of!

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4 thoughts on “Do Any Of Us Have A Chance In The Stock Market?

  1. Huh? Even if you were the only human trader in a world of algorithmic traders, why would that impact the buy-and-hold strategy?

    You seem to imply that there's more fluctuation in the market than previously, but offer nothing to back it up. You also imply that a "computerized" trade, however you choose to define that, doesn't ultimately involve humans buying and selling: someone to authorize the order (and be responsible for it) and someone to fill it (ditto.) I'm sure the chess analogy pertains to this, but I fail to see how.

  2. While i'm not the greatest fan of high speed trading and the like, they are limited by the amount of capital they have access to and if they're increasing fluctuations it might mean that there's more oportunity to make sound long term investments.

  3. Thanks for the comments.

    I believe algorithmic trading can take place without any human intervention after the initial program is set in motion. With the speed at which these computers execute their trades, there is certainly no opportunity for an actual human to 'authorize' them, and since the fills and market making are all computerized, no human action is required. During the flash crash, some stocks trading in the 30's and 40's went down to a penny for moments. Were there really human traders behind those moves? I maintain the answer is no.

    As far as fluctuation in the market, I am again merely stating my personal observation. I entered the workforce in 1996 and started the grand old 401(k) contribution plan at that time. Since then, we've had pretty much nothing but some violent upswing or downswing of some kind or another.

    All of what I'm saying is my own personal opinion of course, but I am of the belief that the markets as they stand today are not 'free' in the sense that we think they are. I believe there's manipulation. I'll probably get more into my thoughts via future blog posts.

    Benjamin, I agree that their capital is limited to a small percentage of their assets, but when their assets total hundreds of billions of dollars (some of which is TARP money, which is the stinker to me), even that small percentage can direct a lot more capital and have more pull on which way the market moves than an individual or even collection of individuals can.

  4. I also dislike these high speed computer trading platforms, because they punch people out of stops and steal pennies from transactions. I think the playing field needs to be leveled and everyone should have equal access to to the markets. Since the flash crash, regulators are taking a serious look at this.

    However, I am a long-term value investor and I still believe if you choose the stocks of good companies, you will make money. If you are a day-trader, trying to make a quick buck, you will probably get smoked by a computer or a professional trader.

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