The High Price of High-Frequency Trading

Whatever its perceived benefits, HFT is changing the way the stock market operates.

It used to be that companies went public to raise capital; investors took risks by buying company stock, and the company and investors were rewarded when the company used its capital wisely.  The principles of supply and demand dictated stock prices, creating an efficient market in which prices adjusted based on market demand.

But HFT is affecting market fundamentals.

The majority of trades taking place today are driven not by company performance, but by tiny inefficiencies that only computers can detect.  While investors are advised to “buy and hold” their investments for years, computers are trading in nanoseconds.  High-frequency traders also buy and sell options, futures, exchange-traded funds (ETFs), currencies and all other financial instruments that are traded electronically, so its impact goes beyond the stock market. read more

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High-Frequency Trading Accounts For Three Out of Four Trades

With graphs of stock market prices looking like the Alps recently, people are hearing a great deal about high-frequency trading (HFT) and its impact on the market.

Except for hearing media comments about it after last May’s “flash crash,” though, most investors know little about it.  So what is it and why should you care?

HFT, which is conducted by proprietary trading desks at big banks and private hedge funds, uses computers to make trading decisions and execute trades based on perceived pricing inefficiencies. read more

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200-Day Moving Average Says the Bear Is Back

Investment managers regard the 200-day moving average price of an index such as the S&P 500 or of an individual stock as the dividing line.  An index or stock trading above the 200-day average is being bought and is in an upward trend.  An index or stock trading below the 200-day average is being sold and is in a downward trend.

The moving average smoothes out short-term price fluctuations and provides a high-level look that makes sense of the market.  For money managers attuned to managing risk, a close below the 200-day moving average marks a change in trend, from a bull market to a bear market. read more

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The U.S. Isn’t Greece – Yet

If a “sovereign debt” crisis in Greece (population 10.7 million) can cause stock prices around the world to fall, what will happen to world markets if there is a similar crisis in the United States (population 307 million)?

The questions is relevant, given Standard & Poor’s decision to lower the U.S. credit rating from the perfect AAA it has held since 1917 to AA+. While some of the recent stock market drop – the worst since 2008 – can be attributed to other factors, such as sovereign debt in Europe and the continuing weak economy, the lower credit rating, has had a significant market impact. read more

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Market Going In Wrong Direction

With profits exceeding analyst forecasts and a debt-ceiling agreement reached, there was reason to believe that the market might be ready to reverse direction and head back up last week.

Given the expectation of continued strong profits, it looked like the S&P 500 could reach the 1,400 to 1,425 level by year end (it’s high so far this year was 1,370).  Now though, the chances for that level of price appreciation are increasingly appearing remote.

Consider why:

  • Credit rating downgrade.  The U.S. government had maintained a perfect AAA credit rating since 1917 until Standard & Poor’s downgraded it to AA+ on Friday.
  • Sovereign-debt crises. Europe’s troubles have spread far beyond Greece.  Ireland, Spain, Portugal and now Italy are all financially unfit.
  • High unemployment. Unemployment remains above 9%, in spite of the $814 billion economic stimulus program, extension of the Bush-era tax cuts and two rounds of quantitative easing.
  • Low economic growth.  Earlier in the year, many were concerned that gross domestic product grew at an annual rate of just 1.9%.  It turns out that figure was too generous.  The Bureau of Economic Analysis revised the first quarter growth rate down to 0.4%, while the economy grew at an annual rate of just 1.3% in the second quarter.
  • The debt crisis.  While last week’s agreement reduced future spending by an estimated $2.5 trillion (assuming the projected cuts all take place), keep in mind that the agreement allowed government to add $2.5 trillion in new debt, which would raise the ceiling to $16.8 trillion.  It also leaves Medicare, Medicaid and Social Security untouched – even though they represent $61.6 trillion in unmet obligations.

Suddenly, the 1990s seem like a lifetime ago. read more

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