Sunday, May 6, 2012
Two years later: Is investor confidence back?
Is investor confidence back? Some may think yes, but from what I am seeing is that people are still continuing to sit on the sidelines. After May 6th 2010, we saw what happens when humans are not on the other side of the trade and the computers take over. How are we supposed to trust the system? I am no expert in this, but from what I see day to day, events like this are still occurring, at a much smaller level, but this could make it worse, singling out investors. The 10% rule on the NASDAQ and NYSE have helped alleviate the situation to a point, but when they open back up a few minutes later, same thing happens again. Not only does this happen with equity, but commodity names as well. Remember last year this week, silver, gold, oil, all took a huge hit? That for sure was not retail getting out. I stand to stay skeptical and think this could happen again at any moment. I myself as a long term investor and part-time day trader was directly affected by erroneous prints that day. SEC Chairman Mary Schapiro four months later spoke out about this event saying, “high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility” Another topic of concern is flash trading where participants can see orders fractions of a second before the other side. This is clearly unfair, even if it is 30 milliseconds, this could be a few pennies or a few million dollars, and it usually is the latter. The main issue here is money and not morals, the participants who see the orders early are paying a fee. The exchanges who still use it today say that it is necessary “to provide liquidity”. Looking at where we are today and how unstable the macroeconomic outlook is already, liquidity is certainly not needed. These firms want more liquidity, or volume for that matter to churn for profits. They want to keep collecting those fees, while hurting the retail investor in turn by getting them erroneous prices on trades. What I think will happen in a couple of years is that there will be no more human interaction on the exchanges, and that scares me. Watching CNBC, it seems like the NYSE floor gets quieter and less populated every day, except on IPO days. These exchanges rely on HFT to give them revenue, which is still very much active today, in asset classes other than equities. What I think happened is that HFT got the investors scared, they left equities, stocks basically trade on holiday volume or less daily, now HFT has taken over commodities and whatever else is left. This past week oil was down almost 10%, some of the trades 1.00 at a time, not human. The exchanges will go out of business and trading will all be done on computers. We are already seeing this in Chicago with the only open-outcry pits left are Cattle. A good piece-by-piece documentary called Floored explains from veteran traders’ point of view how electronic trading is taking over and causing price manipulation with the removal of open outcry. Some people down there for 20+ years are now out of a job or have now gone to the screens. It is not the same. It’s scary to think this is all happening right now, with little regulation, and for some people this is their net income, their wealth, and their jobs being affected. We cannot keep continuing to sit on our hands like the US Government/foreign government and their debt problems, it has been two years, and something needs to get done now.