The history stock is writes every day in the annals of the market. High technological winds blowing in our time do that also in the markets, there are rapid changes that are radically transforming the ways of investing and operating. Markets pulse always gives us chances to learn from them (and ourselves), but there are certain changes that show how the stock market world nowadays, is not that he has changed with regard to the of just a few years ago, but that is a completely different world.
To some extent maybe that even our current financial markets have nothing to do with that Wall Street in the 1980s and 1990s, with yuppies stressed giving shouting orders to brokers that they were made of gold with his mere intermediary labor.
Automated investment has radically changed the mechanics of the markets
Today there is a new way of conceiving the markets, has given us already repeatedly suggests dramatic changes that exist after our click on the page of the broker of the Bank, or better said, our no-click. In the world of the intermediation of today’s automated investment has been imposed with force, or, what comes to be the equivalent of that supposed before delivering your eighties money to a corridor leading to the portfolio of great stress, spending the day glued to the screens, and seeking information as up-to-date and reliable as possible. The big difference is that today your money is what deliveries to an entity, and that at the same time often puts it in the hands of an algorithm. It is one of the consequences that has brought the computerization of global markets.
But how did them before, noted differences between those eighty and the investor medium seems coming not to be many. One puts its money in foreign hands, and expects a profit in return. Superior equation was something that is transferred directly to the broker, he only asked for the return of the investment. But under the more superficial appearances, the differences between those crowded noisy exchanges of stock brokers, and markets of today, semi-deserts under cold electronic screens of quotes, go far beyond mere superior equation.
These profound changes, which have happened silently after our screens, hint at from time to time the vertigo of the potential loss of control over markets that depend on software, with all that entails, and to which also the future is always unpredictable. The big but is that, by their condition of synthetic computer program, in abnormal and irrational situations, these algorithms cannot compete with the human mind, much more creatively prepared for improvisation of the unknown, but also more likely to commit failures by falling passionately irrationality.
The most recent examples of the consequences of new markets
As shown in a button. Surely that does not need to remind you that flash-crash suffered by Wall Street beyond 2010, which can be read in this article from The Economist. More specifically was in May 2010 when the exchanges of the United States began the day in red, in keeping with downward bias after the first bars of the market, mainly due to the concern that the Greek debt crisis. Was to them 14:42, when the market of values began to come is down with unusual speed and force, plummeting is more than 600 points in 5 minutes and coming to mark a loss of 1000 points in the day around them 14:47. The market had recovered to 15:07 and most of the 600 points of anomalous fall had returned to again join indexes. Further investigation undertaken by the all-powerful SEC concluded that they were automated investment algorithms, and their way of operating, which originated the chaos of that day.
Before the pervasiveness of automated investment, we obviously have more examples of serious anomalies, some of which have been translated also in flash-crash. Just a few days ago, we woke in Europe with a flash-crash suffered by the British pound in Asian markets. As you can read in this article from Bloomberg, last Friday, October 7, Europeans stood the bed with the news that, at dawn, in Asian markets, sterling had come to get a bulky 6.1% in just two minutes, after recovering from such and such precipitous fall. And more will come, since this type of investing has come to stay, and feel that there is no perfect algorithm, even less when it comes to improvising to a future which is present at some point.
Flash-crash of the pound seems to have seal of lines of code
In the middle of the marked downtrend which brings the pound for a few months as you can read in this article on the subject, now, at the moment, the Bank of England still maintains an open investigation on what happened that Friday’s flash-crash of the pound, and there are several open hypotheses. Some point to human error of a strong market hand, others a few statements by French President Hollande about the possibility of trading in “hard Brexit” tone, and others to the bleak general economic situation facing the United Kingdom with the negative Outlook in which it seems that the Brexit translates. The part that we are interested in this issue is that, both in the case of the flash-crash on Wall Street in 2010, as the British pound from now, whatever the trigger, synthetic algorithms did the rest, and despeñaron ravine down to the markets.
The high-frequency trading
But the automated investment has a second interesting facet, which is inherently linked to the execution of orders of buying and selling of securities by software. The fact that we are talking about markets led by computer programs, which are able to take pre-codificadas decisions and put them on the market of infinitely more quickly than an operator, makes our synthetic stock brokers able to take advantage of the small asymmetries in the market. It is a world in which the fractions of a second are worth much money. They are small margins of temporary advantage, which together with the second characteristic of high-freqency trading, which is its multiplicity of operations throughout the day, make orders that reach the market milliseconds before others can make of gold to the investor who is behind.
For you to see where comes this synthetic madness, there is a real boom in the price of the floor real estate in the vicinity of the North American exchanges. The reason is that all brokerage houses want to locate their data centers door with door to the market, to thus put its algorithms milliseconds ahead of the competition. You can read in this link of the Wall Street Journal about how this avidity scratch milliseconds has done that you have created a new business model with the collocation: sell to financial intermediaries the possibility to put their servers even in the same data center that are hosted the exchanges servers: literally a cable wired with data processing of the stock market in question. And, obviously, this has its price, and its corresponding profitability.