The first and most important thing to understand about the U.S.
stock market is how few humans are actually involved in the decision to
buy or sell large blocks of shares. Machines do most of the trading. ...
HFT is a gigantic skimming operation that exploits tiny differences in
the bid/ask prices of stocks to buy and sell millions of shares for
slivers of profit that are multiplied by millions of shares traded in
seconds. ... Other computers are programmed by math-wizard "quants" to trade momentum and technical signals.
In other words, unless you're a robot (not that there's anything wrong with that), you aren't pitting your skill against other investors or traders. It's no longer a game of skill at all. Market moves are down to computers' ultra-fast reflexes. They can be in and out of a position a dozen times (or a hundred times for all we know) in the second it takes for you to click "Buy" or "Sell" in your trading platform.
Hang on. The securities market is as regulated as any business on earth. The government is keeping its hawk's eye on things to protect you, friend. Oui?
Smith says non.
The second important thing to know about the stock market is
that central banks and governments intervene as buyers to trigger
rallies and put floors under declines. As noted above, huge
buying of futures triggers opening rallies. It is a poorly kept secret
that central banks or officially sanctioned but cloaked "plunge
protection teams" are doing the buying.
Once again it is relatively easy to steer the market because humans
and computers alike are keyed on certain well-known technical signals.
For example, if the 200-day moving average of the SPX is 1,300, and the
index dips down to that level, computers are programmed to sell if it
breaks below that support level or buy if it spikes above it.
But wait! There's more!
The third thing to know about U.S. stock market is that their
operations are opaque, invisible, and hidden from the citizenry and
non-Elite human traders. How much of the market volume is
computers skimming via HFT can only be estimated. Official buying to
spark rallies or stop declines dead in their tracks is also hidden from
the citizenry.
The idea that the government's financial black ops runs a "plunge protection team" is almost an article of faith in alternative commentary sites such as Zero Hedge. By definition, proof must be elusive, but Ghost Money doesn't rule it out.
In our view, that does not condemn the individual investor to be sucked into a whirlpool and disappear. Ghost Money assumes, as its subtitle -- investment in a world gone mad -- says, that the context has changed. The game is to work within the system to make money, even if the system is crazy. After all, the stock market has always been irrational, blown hither and yon by winds of fear and greed, fantasy and bias. The trick has been, and still is, to use jiu-jitsu against the "big" players.
Whatever causes them, ultra-fast computers or government stealth traders, the numbers on the screen are the numbers on the screen. You can still buy and sell at your chosen price points. Ghost Money agrees with Smith that it would be healthier if the market were about shares of companies rather than programmed formulas, and maybe one of these days we can welcome reforms. We think it makes no sense to huddle in your tent meanwhile when there are still opportunities to profit.
The fourth and last thing to know about U.S. stock markets is
that this skimming and intervention have left the markets extremely
vulnerable to collapse. Official but secret intervention is
called the "Bernanke put," meaning that the Fed will intervene to keep
the market aloft, regardless of what is happening in the real world of
the global economy. ...
Since HFT and quant trading robots are programmed to buy and sell at
commonly-known technical signals, if certain levels are broken to the
downside, the selling will quickly avalanche as trading machines issue
sells.
But markets have always paid fanatical attention to technical indicators. We once asked a professional trader what was the big deal about a 200-day moving average, or a 50-day moving average. Why are their "signals" more important than a 198-day or 55-day moving average? His answer: no reason at all, except that institutional traders (and many individuals) are focused on those numbers. When the averages are broken, on the upside or downside, traders react en masse, not to the market but on how they assume other traders will react. (Keynes said the stock market is a beauty contest in which you choose, not the contestant you think is most beautiful, but the contestant you expect the other judges to find most beautiful.)
So it's hard to see why computers buying or selling at pre-selected signals presents the individual with any greater dilemma than has always been part of the playing field.
As for the chance of HFT/quant-generated super crashes, the market has been fairly good at creating those on its own without manipulation by anyone other than individuals and traditional money management firms. Let's assume that the risk is now greater for such events. Ghost Money says you should always keep a cash stash to take advantage of them by buying at distressed prices! The wise virgin keeps her lamp trimmed and burning.
Keywords: [HFT] [plunge protection team] [technical signals]
Ghost Money's author does not claim to know what he's talking
about. He is not an investment advisor. This site is for entertainment,
if it can even manage that.
