There is a lot of talk about how bad HAL2000 (one of the earliest machines or computerized trading) is. Computers are taking over stocktrading and how the extra liquidity is inflating stockprices. But the extra added stockvolume is not only created by this, also by QE (Quantative Easing) and money ceation, We as the private stocktraders of 2020 should take this in account and use it to our advantage. When you know and understand what is happening it is a lot easier to trade with it.
How stocks are traded around the world has been totally transformed. In the last decade, algorithmic trading (AT) and high-frequency trading (HFT – wikipedia) have come to dominate the trading world, particularly HFT. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded on up to sixty competing venues where a computer matches incoming orders. A majority of quotes are now posted by high-frequency traders (HFTs), making them the dominant source of liquidity in the market. But this is not a bad thing. During 2009-2010, more than 60% of U.S. trading was attributed to HFT, though that percentage has declined in the last few years. In 2018-2019 it was a little over 50%, still the majority.
Just look at the first minutes of opening prices on any daily chart and you will see some big spikes in prices as well up as down. You could argue that “The fat finger” as it is also called, or electronic trading pose new types of challenges to the financial system. Algorithmic and high-frequency traders were both found to have contributed to volatility in the Flash Crash of 2010 (May 6 – wikipedia) when high-frequency liquidity providers rapidly withdrew from the market. Several European countries have proposed curtailing or banning HFT due to concerns about volatility.
To explain HFT, orders are managed by high-speed algorithms which replicate the role of a market maker. HFT algorithms typically involve two-sided order placements (buy-low and sell-high) in an attempt to benefit from bid-ask spreads. HFT algorithms also try to “sense” any pending large-size orders by sending multiple small-sized orders and analyzing the patterns and time taken in trade execution. If they sense an opportunity, HFT algorithms then try to capitalize on large pending orders by adjusting prices to fill them and make profits.
Also, Ultra HFT is a further specialized stream of HFT. By paying an additional exchange fee, trading firms get access to see pending orders a split-second before the rest of the market does. You can see why speed is important for HFT traders and originally these traders were set up as close to the market makers/stock exchanges as possible because a shorter distance means less latency in simple words a shorter internetcable means less time for your data to travel.
Lately speed is not something which is given as much importance as is given to underpriced latency. Latency implies the time taken for the data to travel to its destination. Hence, an underpriced latency has become more important than low latency (or High-speed).
According to Bloomberg, Speed is still important, but it’s internal, not external. Traditional HFT meant a short time between an order coming to market and your ability to take it. It consisted mainly of external transmission delays, firms quickly learned to make their internal decision time so fast that it was insignificant to the outcome.
Internal decision time goes into deciding the best trade so that the trade does not become worthless even after being the first one to pick the trade.
But we as (day)traders can also benefit from this by taking advantage of these sudden price drops or price gains. Just as long as you know that it can happen. It can also mean extra money on your trade. If you predict it’s arival and not get nervous when it jumps the other way. It will rebound. Stock trading is not what is was 20 years ago, not even what it was 10 years ago, and not even what it was 2 years ago. Deal with it. As BillBull always says: “What goes up must come down” And my personal pet: “Patience is your best weapon”. Remember that it is there and use it to your advantage.