Tuesday, August 14, 2012

The Need For Speed

In 1998, the New York Stock Exchange (NYSE) allowed computer generated trading to buy/sell on the exchange. For some time this lowered the costs to investors and also caused the guys screaming their deals on the floor of the exchange to lower their costs in order to compete. But as time goes on and as humans are want to do, getting an edge, ever so slight, is the difference between winning and losing. There have been some spectacular glitches in the recent pass beginning with the flash crash of 2010 and ending recently with the Knight Capital Group screw-up.

Not to be deterred by the above, we learn that the need for speed has moved firms to consolidate so that they can physically shorten the cable distance between servers to increase data transfers and now firms our also moving from fiber optics to microwave technology in order to gain milliseconds over their competition. How is this impacting the investor? It is a mixed picture at this point. Fees are starting to increase and the spreads between buy/sell has narrowed to the extent that you really need large blocks of stocks to make money and of course trading in large blocks can also lose you  alot of money. High speed traders make money for their clients and themselves by selling on the slightest increase and buying on the slightest decrease of a share price. Small investors can't make the returns they did post 1998 because the spread until recently has been decreasing.

"Terrence Hendershott, a professor at the University of California, Berkeley, said he had been an advocate for technological innovation in the past, but had begun to wonder if the continuing battle for technological superiority had become too much.
You’ve got arguably too many people, in too small a space, and they just keep spending enormous amounts of money,” Professor Hendershott said. “Can I convince myself that we are really seeing a lot of benefits? No.”
NYT: "On Wall Street, the Rising Cost of Faster Trades", by Nathaniel Popper, August 13, 2012.
NYT: DealB%k, Wall Street's Race to the 48-Millisecond Trade, by Eric Owles, August 15, 2012.

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