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