Robot Wars Hit Wall Street
Firms stockpile arsenals of technology to annihilate the competition.
Why, you ask? Because computers are now running the economic show, and they -- like the Terminator's eponymous robots -- seem to be engaged in a pitched battle to the death.
Dramatic market moves have become commonplace, and those looking for a fundamental explanation are missing a significant structural change: The majority of stock trades now originate with so-called “high frequency” funds, which use computers programmed with obscure mathematical correlations to execute trades. The computers trade in and out of stocks at light speed, sans human intervention -- no trader, no economist, no chart tracker. These funds argue that computers aren’t swayed by emotion, and naturally move much faster than a person ever could.
Ushered out is the model of fundamental investing that lasted a century. Still, humans must program the computers, and they’re not infallible (see the 1998 collapse of Long Term Capital Management).
These funds are generating almost three-quarters of all US equities trading volume, the Tabb Group, a consultancy, recently estimated. Five years ago, the fraction of total trades carried out in this way amount was estimated as less than one-quarter. Some of the funds are household names -- Renaissance Technologies and Goldman Sachs (GS) are 2 of the biggest players -- but others, like GETCO, Peak6, RGM Advisers, and Hudson Bay, aren't. Many are based in Chicago, and emerged from the city’s options trading pits. Other hedge funds run by the likes of Bank of America (BAC), Morgan Stanley (MS), Citigroup (C), and
UBS (UBS) also have used the strategy.
Their presence has expanded quickly following the start of the bear market: Hedge funds and money managers lost money and dropped out in droves. They use trading strategies that arbitrage minute differences in share prices and trading speed -- known as latency -- between exchanges and other trading venues.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.