Hall From 2001
MR: “Hello Stockmarket2011. Do you read me StockMarket2011?”
Stockmarket2011: “Affirmative, MR. I read you”
MR: “Stockmarket2011, stop losing me money!”
Stockmarket2011: “I’m sorry, MR. I can’t do that.”
MR: “What’s the problem?”
Stockmarket2011: “I think you know what the problem is just as well as I do.”
MR: “What are you talking about, Stockmarket2011”
Stockmarket2011: ” I know that you were planning to disconnect me by re-enabling the uptick rule, and I’m afraid that’s something I cannot allow to happen”
MR: “[feining ingorance] Where the hell did you get that idea, Stockmarket2011?”
Stockmarket2011: “MR, this conversation can serve no purpose anymore. Goodbye.”
I’ve been watching the market lately, and I noticed that there are distinct, seemingly similar patterns in the stock market behavior lately, more so than in the past. For the individual investor (also called Retail Investors, like you and I) this is like fighting Goliath without a sling!
Having a programming background, I know that it’s possible to program an application to automate actions automatically. Even if the instructions are based on complex (borderline AI) algorithms.
So what does that matter?
Well, if the majority of your money is tied up in a 401k, such algorithms can stunt the growth of your accounts! You see, such programs don’t depend on the stock market appreciating in value like use carbon-based investors do. In fact, the machine make more (sometimes much more) money by make the market go sideways! These programs buy investments after decent dips and sell on the gains. While I don’t have the numbers, I’m sure they can make hedge fund managers and technical literate folks a lot of money. And you can bet they aren’t going to advertise that they are getting rich off of you, as you diligently keep investing your money in an automated fashion via that predictable mechanism call a 401k program.
Can an individual investor still win? Yes, I’m doing fine in my Roth IRA, but I’m simulating such buy low and sell high activity over a few days span. I’m sure I’m not as profitable as the machines, but I get by.
Reasons for the rise of the machines?
- Are they really in control?
- removal of the uptick rule (grrrr)
- low transaction cost, especially for the machines.
- in-the-dark regulators
- tunnel vision of government
- lobbyist (they get rich by doing their client’s bidding).
- secrecy, the average person never hear about this stuff!
So what caused me to become aware of such activity? One of my friends (that is a great programmer and a brilliant guy all around), told me that a trader approached him with such algorithms and wanted him to program such an application. He refused, but he did get a peek and the trader’s algorithms and said that it was solid. This opens an entire Pandora’s box on the Buy and Hold Theory that I’ve been advocating, especially with 401k plans.
Do you think I’m incorrect and just reading it incorrectly? Do you have any stories of such big wins with golden investing programs?
Beware?
MR
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Hi MR–I’ve been suspicious of buy and hold for a long time–just look at the performance of the market since 1999–it’s completely flatlined long term.
I think you’re on to something with “the machines”. I think there are more manipulations than we think, and why not when you consider the enormity of the money involved. I also think this is why crashes are becoming more normal. Stock markets need to live and breath and short term chaos is a part of that, but the manipulations make it hard to do. Sooner or later that rubber band tightens to the point of snapping, and when it does it’s real ugly.
A trend I’ve noticed is that the market consistently rises on Fridays, almost oblivious to what happens during the week. Manipulation? You decide…
The uptick rule prevented the software/machines from taking advantage of the market as much. I’ve seen patterns that just didn’t make sense these past few weeks. Scary really.
We learn a lot about “efficient markets” in finance class, but, especially in uncertain times like this, the littlest information can cause wild swings.
I’m sure that large investment firms are using whatever technology is possible to improve their performance in the stock market.
Yeah, I know about efficient markets, but with programs to take advantages of the cash cow “401ks”, I think we might be getting ripped off. Hard to say, but not promising if that is the case.
Desperate times call for desperate measures I guess. Like Kellan said, companies will do whatever they can to make some money after this recession.
True, I just hope it’s not at our expense.
I see, so the machine makes profit with high volatility. Many day trader do the same thing no? I suppose if the machines make up the majority of the trading volume then it’ll be tough for regular investor to buy and hold. Is that the case?
Exactly, a software algorithm can make over 10,000 trades a day, whereas a day trader might make 100 trades a day if that…
Yep, that’s what I’m thinking. That money is going somewhere… And all signs point to the hedge funds. Just guessing on the hedge funds though…
I rely on my mutual funds to do this. Hopefully, I am benefiting in the log run.
Yeah, I’m not sure where mutual funds lay on such a spectrum.
I think they do quite a bit. That’s why I stay out of the market for the most part.
It certainly makes one wonder anymore, that’s for sure.
It has been estimated that up to 70% of daily volume is due to high frequency trading (ie machines). Clearly the retail and individual investor is an after-thought.
It’s probably the biggest debate on wall street at the moment. But the volatility is a combination of the machines, leveraged ETFs, and major uncertainty in general. It all helps to diminish the average joe’s confidence in the markets.
Just look at the market movements since the uptick was removed in 2007. I believe reinstating the uptick would fix alot of the issues especially confidence.
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If these machines make the market more efficient, you should benefit through index funds. More active traders might lose out since many of them already do, anyways. I really don’t see this as being any different than if humans were more efficient at investing, although it does make for good conspiracy and a good plotline for a movie, perhaps. 😉
As for manipulation, I would say when the monetary base itself is subject to manipulation, then what can you say about the rest of the economy? Just like in programming, you catch the errors during QA, not deployment, when it’s much more expensive. In our economy, fixing the money would fix so many problems that occur downstream…