Algo’s aka SKYNET, A Bigger Problem than High Frequency Trading

Earlier we mentioned Michael Lewis along with his new book Flash Boys has brought much attention to the world of High Frequency Trading.  There is a bigger problem in our eyes that should garner more. As a side note, Jack Bogle, Founder of Vanguard in this Bloomberg TV segment totally supports HFT and trashes Lewis and his book promoting.

Algorithmic Trading is the Elephant in the Room

Algorithmic trading is a computer driven program that is used to automate some type of trading system, also called Algo’s.  We have nick named them SKYNET, from the Terminator series.  The Algo’s we have a problem with are the ones that create extreme volatility in markets without cause.  There are Algo’s in control of so much money that when the program moves a direction it is best to step aside.

Automated trading with big money behind it creates higher volatility and may someday lead to a dramatic market event.

Take a look at this chart from 4-15-14. This is the S&P 500, 1 minute chart for the day.

S&P 500 1 minute chart 4-15-14

There was very little news on this day. This swing is most certainly the  Algo’s at work.

While no major damage has been done YET, we fear this may not always be the case.

Our answer to Alog’s …. Well just another reason terrific diversification in today’s investing world is a must.

Have a Great Day!

John A. Kvale CFA, CFP

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

 

5 responses to “Algo’s aka SKYNET, A Bigger Problem than High Frequency Trading

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  4. Randy,

    Sorry for the delay on this. HFT trading is basically just trading for the pennies with no reason. The HFT’s focus only on the buy and sell and try to make money by getting in between. Algo’s are computer driven systems that trade for a macro profit reason, such as a breaking headline story or earnings release. The Algo is trying to make money by being fast and reacting to the story. The Algo’s I am talking of here are not focused on the buy and sell as much and want to deploy money based on a event or headline.

    Great Question…

    Have a great day!

    John

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  5. John, I was under the assumption that most HFTs probably were using algorithms in their systems. What is the main difference in what SKYNET is doing and the HFTs? I have yet to read one page of Lewis new book, so I have no idea about the specific HFTs he bases his information.

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