1/02/2013

Algorithm trading is anathema to a healthy stock exchange

The fundamentals of a healthy stock exchange trading system are all about fair trading, equal opportunities, level playing field and transparency. All relevant and price sensitive information must be disclosed at an appropriate time to ensure fair play. Otherwise it will be insider trading and a violation of the exchange by laws. Buyers and sellers are to submit their bids into the trading system in a transparent manner for all parties to know what is going on. Hiding bids, placing fictitious bids or acts to confuse or deceive other traders and investors are also forbidden and can be punished by the stock exchanges. In short, no one is supposed to have an advantage over other parties by virtue of financial power or technology. No even unfair access to sensitive information.

In algorithm trading, many of the fundamentals of stock trading and stock exchange by laws have been violated and breached. The practice of allowing funds or brokerages to plug their super computers into the exchange system is itself a violation of fair trading and level playing field. How could these funds and brokerages be allowed to have such an advantage over other traders that did not have such expensive facility/equipment and access to time sensitive information to their advantage? Many exchanges even facilitate the big funds to hide and conceal their intent and bids to buy or sell, creating a false market. Innocent traders could thus be deceived of the market depth and spread with such computer assisted trading process.

Algorithm trading also takes advantage of size and speed. It is incredulous for an exchange to allow algo traders with such an advantage of time, making profits in micro seconds, and think nothing about it. It is criminal for exchanges to allow algo traders to trade in big volumes to bulldoze and to corner stocks, to distort the real value of shares and the market.

Computer technology must be harnessed to facilitate and ease trading without creating an unfair and unlevel playing field. Algo trading cannot be allowed into any stock exchange trading system if it violates the by laws and trading rules and regulations. For a fair and equitable system, as the traditional stock market used to be, it is best that such a system is closed and no external computer system is allowed to tap into it to take advantage of other investors and traders. The justification of algo trading to facilitate huge trading volumes cannot be the reason to give it an unfair advantage to profit from the system. Big traders and volumes should be entered into the system in a transparent way, by human operators, with the same advantage and disadvantage of manual input.

The regulators and authorities of stock exchanges shall bear the responsibility to ensure a fair and equitable trading system for all parties, big and small. Failing to do so is to be an accomplice to a crime against the victims for unfair practices. It could also be seen as an approval to allow foul practices in the stock market.

Computer technology like algorithm has reached a point when it can be very dangerous and unfair to other traders, and also the ability to create havoc and serious glitches to a trading system. The official position of the New York Stock Exchange on the May 2010 freak crash of Dow Jones is that it was totally an act of the computers, a computer ran amok. The truth is more than meets the eyes, and there is likely to be a culprit that profited from the 5 min crash and making a pile for himself. Algo trading has no place in the proper operations of a stock market. It is there to cheat, to take advantage of innocent traders, it is unfair trading. Algos were not developed at a very high cost, with very expensive equipment and technology, for nothing. They are designed to make huge profits by relying on the power of hi speed computers. Someone must pay for it. The more expensive is the system, the more treacherous it is and the more it demands for payback.

Do not be deceived by algo or computer trading. Like big foreign funds and hot money, they are not here to do charity. They have one common mission, to make as much money as they could, from the unwary and innocent lay people and traders. Algo trading is a Frankenstein in the stock market. For stock markets to survive and tradings to be healthy and fair, it must return to a close system where every human trader enters his bids the same way, in a transparent manner be it big or small amount. Allowing computers and algos to do the trading is a sure way to the demise of a stock market, a matter of when.

6 comments:

Matilah_Singapura said...

Nonsense lah. Machine-driven program trading is here to stay. And it will evolve into who-the-heck-knows-what.

Capital already travels (transfers) at sub-light speeds: direct-debits, credit/ debit card purchases, on-line payments etc. And it is all done by machines. No humans with ledgers involved.

So then, it is reasonable to expect capital and capital ownership to be transferred in markets, which it is and has been for centuries; but only now we can use automated, and very soon autonomous machines.

Matilah_Singapura said...

I just bought the book.

http://chrissteiner.com/

Anonymous said...

Ha ha, while you are still obsessively preoccupied with this Algo thingy, we are laughing all the way to the bank with the recent rally.

Chua Chin Leng aka redbean said...

Glad you made some money. I did too. But this is just a flash in the pan. Algo is a serious thing and must be gotten rid of fast.

Matilah_Singapura said...

redbean:

>> must be gotten rid of fast. <

Good luck trying :-)

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