Some may be wondering what is happening to the stock market with the ridiculous yo-yo action of recent weeks. One of the problems is the advent of high frequency trading (HFT). The action can actually build on itself in either direction, up or down. This is all computer driven and has no relevance to the actual value of the underlying companies. The computers simply follow their programs and either buy or sell based upon the imbedded commands, often following the market as a whole but exacerbating the normal movements. Then Dow can move hundreds of points in seconds, making it very difficult for individual traders to make rational decisions.
Consider this. Can a large company like AT&T for example paying a dividend of almost 6% suddenly in one day become worth 5,6,7% less than it was the day before? Of course not unless there is an event specific to that company. We are all along for the ride folks so fasten your seat belts and hope the computers feel sorry for your retirement funds. Uh, sure!
Ken Dillenburg
Here is an example for those interested......
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.