Post by alcc on Apr 13, 2014 12:32:36 GMT -5
I'm reading Michael Lewis' latest book, Flash Boys, right now and there's a lot in there that explains why the markets are so volatile. Basically, the more the volatility, the easier it is for the HFT algos to front-run trades and profit from price movements.
In a lot of ways it's demoralizing to know that with enough hardware, software and physical proximity to the exchanges, a lot of big banks and hedgies are able to steal money from honest investors. OTOH, the algos are mostly pitting themselves against each other, and if a small-time investor can muster the intestinal fortitude to ride the bucking bronco, there seem to be more opportunities for entry points into solid companies.
IMO, the volatility is being directly fomented by the Big Boys behind the scenes pulling the strings of the media talking heads (and financial bloggers/writers) and I think one of the consequences may be that technical analysis has become less effective--too many artificial "Black Swan"s--and value investing may experience a Renaissance. Of course, I'd prefer if the HFTs were simply outlawed (and the playing field thus made just a bit more level...)
Much in Flash Boys is inaccurate, oversimplified, sensationalized. Search and read the responses to it for balance and corrections. Also, it is not big banks (and likely not even hedge funds) who are doing front-running and HFT. Rather, it is a bunch of hot-shot upstarts enabled by the electronic exchanges who allow them to effectively hack into their system to access SIP. This is illegal per reg NMS, but nothing new: brokers and floor traders can and have done the same thing.
www.washingtonpost.com/blogs/wonkblog/wp/2014/04/04/a-veteran-programmer-explains-how-the-stock-market-became-rigged/
For me, Lewis lost all credibility when he kept plugging Thor and its creator: to use 4000 miles of optical fiber to simulate a delay? When a couple lines of code implementing a simple timing loop would do the same job?