Wall Street – Faster or Better?
// Posted by Lois on 06/04/2015 (7:32 PM)
When I read the article Raging Bulls: How Wall Street Got Addicted To Light-Speed Trading I immediately had a mental image of the stock market trading floor. Men and women rushing around multi-tasking-talking on the phone, emailing, talking to colleagues and all the while watching the numbers and multiple monitors ever so closely. It’s interesting that the article begins talking about “flash failures” that are occurring with increasing frequency as traders want more and they want more…faster!
Time is of the essence when trading on Wall Street or any other trading floor location. The goal is to make the trade as quickly as possible and to send and receive data at warp speed. But, is the infrastructure that is currently in place sophisticated enough to provide what traders are seeking? Apparently not according to investors who are looking to make lots of money in short periods of time. Will the need for speed increase errors? Or will it turn the ordinary trader in to a superman or wonder woman. People who are forever striving to increase what they and the market technology can produce. I’m reminded of the movie Wall Street with Michael Douglas and the cut throat environment among the employees. Who would make the next sale and for how much?
As we read, “faster and faster turn the wheels of finance, increasing the risk they will spin our of control.” We read that machines can operate faster than humans and “intervene.” What does this mean for the market trader? It means competition and probably hasty decisions with non-profitable end results. If a machine can make investment decisions based on data faster than an individual can make the same decision based on assessment of data and the state of the economy, where does that leave the workforce? Will it one day be obsolete or at the worse, decreased tremendously? If market trends can be analyzed by computers, who needs employees, right? Well, not so fast…servers and fiber optic cables are privy to hacking and failure for technological reasons. Machines can’t replace people in all aspects of market trading. People need to build and install hardware and cables to make the process function. But is it ever fast enough? That’s the question.
Data travels as lightening speed from one machine to another and from one geographic area to another. We read that often data is outdated by the time it arrives to its destination. This “need for speed” is why Wall Street is addicted to high-speed trading. There will always be faster competition coming along to replace existing networks. Companies are developing new and better fiber optic cables to reach from point “a” to point “b.” The field is driven by competition and sales. Manufacturers of cable are constantly needing to upgrade to stay marketable. Algorithms are written by people and they are changing as fast as the market is trading. This cycle of faster and faster – how does it affect the overall economy? Well, first, a higher volume of trading has to take place to make the same amount of money as the technology and data speeds increase. People are working harder and harder for the same return. Trades are executed to the thousandth of a cent to be competitive – not by traders but by computers. Things are happening so quickly on the computers that the average trader can’t keep up.
The company BATS who offered an initial public offering of its stock, closed down other companies because of a glitch in the system just seconds after trading opened. Because of a software glitch, trades were frozen and this affected other companies who operated on the same server. Perhaps this was a true “glitch” in the system but it also presents opportunity for bad behavior by someone who might not want an IPO to be successful. Like anything else, there is the good and the bad. Stock prices are inevitably going to be affected by new technologies and financial activity. And, greed is going to be present in all areas of the market.
I can’t pretend that I understand how the stock market functions or that I really want to, but I do understand competition and stability. Competition is high in the stock market among traders and stability is low. Low stability, I think is due to the fast moving parts and the desire to move even faster. Will it ever be fast enough? It will be interesting to see how data driven functions will affect the stock market in years to come. If we’re at light-speed trading today, what could it look like tomorrow?!
Watch this clip of Gordon Gekko (Michael Douglas) talking about greed in the market and why it is “good.” From the movie Wall Street…