A tweet – 12 words, 140 characters – caused a selling frenzy last week, as the stock market dumped $134 billion in stocks in a minute and a half and the Dow Jones Industrial Average dropped 1 percent of its value, or 143 points.
The market recovered quickly, as the Associated Press announced that someone had hacked into its computer system and posted a fake tweet about two explosions in the White House.
But the hoax served as a frightening fire drill. If it had been real, the average investor would have been burned alive.
We’ve warned readers about the dangers of high-frequency trading before. This is an example of why we’re concerned. If the White House explosions had been real, the algorithms that make decisions for high-speed traders would have continued selling, leaving the average investor behind as stock values tumbled.
Rick Santelli, on-air editor for CNBC Business News, said high-frequency trading has turned the markets into “high-speed casinos.”
“I have an issue with high frequency, high speed anything that requires nano, nano, nanoseconds to provide the wonderful liquidity we all must have,” Santelli said. “Is it any surprise that, you know, the average guy on Main Street looks at this and goes, ‘None of this is for me. You people are all crazy.’ ”
As consultant David Lauer of Better Markets, Inc. put it, “The sophistication of your trading strategy is no longer a defining characteristic of its success, rather the number of microseconds that it takes your software to react to a piece of market data has become one of the most important factors of success in the HFT industry.”
When trading success depends on the speed of your computer, rather than a trading strategy built on insights into market fundamentals, the average investor is in trouble.
Active Management as Antidote
During the Twitter Flitter, our matrix – or order entry screen – was moving so quickly it would have been impossible for any human to react.
The tactical asset management and active investment strategies we use for individual investor’s portfolios, though, are designed to help mitigate risk. Active management can provide added diversification to smooth market volatility, take quick advantage of opportunities and improve performance.