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Have The Geeks Killed The Golden Goose?

Technology has a way of being disruptive.

I mentioned some little gadgets from Fusion-io which can turn your desktop screamer into a 2TB 1 Gigi per second screamer. Some of the server arrays out there with optic networking are providing surreal performance and it seems, surreal profits.

I notice that I haven't been the only one into the speed machines. Algorithmic trading has scaled new heights, perhaps reached it's zenith. It's probably getting close the point of being counterproductive for the traders, and has already passed that in the context of the wider market.

Are we approaching a point where we see a small group of rival speed machines jockeying for micro-positions and feinting at each other in an attempt to achieve an ever narrowing margin?

I'm sure it seems like a good idea, and it certainly makes money for the early movers, but I'm not sure it adds value. It may be taking all the value out of the market for anyone but the machines.

What will be the result? Fewer direct investors in the market? Day traders reduced to gamblers, without any ability to react to the market meaningfully (profitably) no matter how good their knowledge, because they'll be spotted and gazzumped my microseconds and forced to pay more /make less. Will it drive all small investors out of the markets altogether?

It can't go on indefinitely making profits at everyone else's expense.

How long before small investors return to the markets? After the crisis and endless revelations about dodgy companies, banks, brokers, investment advisers - will this, the end of any semblance of a level playing field in the market be the death knell of the stock market as we knew it?

Would you buy shares if you knew what you were really up against?

What will it do to the markets?

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Comments: (6)

Paul Penrose
Paul Penrose - Finextra - London 24 July, 2009, 14:43Be the first to give this comment the thumbs up 0 likes

Citadel Investments on Tuesday acquired a majority stake in Equiduct, the European multi-lateral trading facility operated by Borse Berlin. The US hedge fund, which specialises in high-frequency black box trading, says it is looking to turn its new acquisition into a pan-European trading platform aimed at retail investors (my emphasis). Now, how many potential conflicts of interest can you count?

A Finextra member
A Finextra member 26 July, 2009, 02:48Be the first to give this comment the thumbs up 0 likes

I did notice that gamblers finding out that the game was rigged in favour of the house didn't make casino's any less popular.

Now there's a business - everyone is a loser, it's the only business which can kick you out of the casino purely because you are a winner. What a fantastic investment - you can't lose. Isn't that what Bernie said?

Alexander De Lange
Alexander De Lange - Aurelia Financial Consultants cc - Johannesburg 27 July, 2009, 09:15Be the first to give this comment the thumbs up 0 likes

I seem to recall having learned somewhere, eons ago, but then I am a tad older, that financial markets are supposed to provide those seeking funding with efficiently priced capital, as well as those seeking to invest surplus funds with an equitable return. Mediation, hallelujah! But when the mediation (mediator?) starts becoming more important (the ultimate goal?) than those being mediated, something is somewhat awry?

A Finextra member
A Finextra member 27 July, 2009, 09:29Be the first to give this comment the thumbs up 0 likes

Nice to hear from you Lex.

I can't help but think that once the public catch on, its the end of the stock markets...or perhaps the beginning of completely new ones.

John Dring
John Dring - Intel Network Services - Swindon 27 July, 2009, 10:29Be the first to give this comment the thumbs up 0 likes

Are you describing a super-low level form of 'front-running' where the buy/sell is detected just slightly in advance and then gazumped and cashed straight after - making buy-sell cycles in seconds not minutes.

Surely the place to be doing this is on the 'inside' and at the expense of all thsoe traders and funds you are supposedly supporting. 

The whole system stinks, but there's simply no way to just stop the world and get off - and putting the genie back in the bottle won't work either - we just have to compete and evolve, until driven to extinction.

A Finextra member
A Finextra member 27 July, 2009, 11:34Be the first to give this comment the thumbs up 0 likes

Hi John,

I believe they measure the time-frame in milliseconds like you order, they see the order before it is executed and have time to front run it and step out leaving you to pay a little more.

There are some structural flaws with our system when companies no longer operate with investor's capital and are generally geared to the maximum. Combine that with markets which rather than being a place for raising capital, become a forum for some very sophisticated gambling and even more sophisticated 'sure things'. Add gamblers who have no interest in corporate earnings other than to drive share prices with analysts at the point they want daily financial reporting to maximise the possibility of creating price movement and throw in some top end only front running and we are in unfamiliar territory. It certainly isn't sustainable. There has been a loss of confidence in the markets by individual investors and this has yet to play out.

The danger is that we end up with only a few big kids in the game, which has become some sort of cyber war between behemoths connected by optic fibre leashes to the exchange.

That isn't, as Lex pointed out, what the object of the exercise was when the exchanges were formed.

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