...On May 6, 2010, if you remember, the stock market dropped 998 points, the single largest one day drop in the DJIA. But then it rebounded. In 15 minutes, the stock market lost 7%, about $1 trillion, of its value. If somebody lost, somebody gained.
The scary part was that the immediate answers were that it was possibly caused by computer glitches. In layman's terms...that's bad. HERE ARE SOME CONSEQUENCES.
Most Americans have their savings in real estate they live in, and stocks. Both are (should be) long term investments for most of those 'most Americans.' But both have so much riding on the day-to-day, that panics occur, and good people lose.
...I haven't paid much attention to the aftermath of what happened. I haven't pulled my life's savings out of the market (though its on my to-do list). But while I was checking the Workout-of-the-Day on Crossfit, I found this article:
Market Data Firm Spots the Tracks of Bizarre Robot Traders by Alexis Madrigal
"...Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation's stock exchanges...
...(Nanex) the company spent weeks digging into their market recordings, replaying the day's trades and trying to understand what happened...
...High-frequency traders do employ algorithms to look for patterns in the market and exploit them, but their goal is making winning trades, not simply sending quotes into the financial ether...
...In a sense, they take nickel-and-diming down an order of magnitude or two. The advantage is that their trades are low-risk: they rarely hold positions for very long and any individual stock, future, or currency can't really sink the boat. High-frequency traders have become a target for all kinds of people, but most of them appear to make their money being a little faster and little smarter than their competitors. And if they are playing by the rules, they improve the quality of markets by minuscule amounts trade after trade after trade...
But the algorithms we see at work here are different. They don't serve any function in the market...it wasn't immediately apparent what such order placement strategies might do..."
...so, what you have is companies that have very large very fast computers, which make orders to purchase a stock when it hits a certain price, and sell at another. Kind of like an ebay auction. You know how that usually goes. If you are an individual without that fast computer - you are not getting that helmet for $14.99...it went for $15.02 at the last second, or half-second.
Found in the comments section of the on-line article:
"Or do the patterns emerge spontaneously, a kind of mechanical accident?" Very Funny. High frequency traders might have you think that, though. Truth is, they aren't dropping major coin on their computer systems to "make noise". The trading patterns which emerge at the millisecond profile are no more accident than hostile tanks rolling into Poland were.
It tells you that conditional orders, like a stop-loss, are no longer of positive value to the stockholder trading through a traditional broker, or through any other low frequency trading platform. In fact, such orders would correctly be viewed as being of negative value to the stockholder. You won't hear such things in the WSJ, to be sure.
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