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!