Robo-trading: the superfast stockbroking strategy that affects your retirement funds

Advocates of HFT argue that it provides additional liquidity and so narrows the gap between buying and selling prices. Yet when market conditions turn adverse, HFT firms can switch off their robo-traders and then liquidity vanishes – as we saw in the “fla

The image of a crowded trading floor with brash young stockbrokers shouting into telephones has ceased to be representative of how most financial assets are traded. Most of today’s trading has migrated from trading floors to virtual electronic exchanges. The benefits include a more efficient system, because they provide liquidity and transparency, and also better price execution. However, in the past few years, an insidious new trend, “high-frequency trading” (HFT), has developed and is spreading stealthily.

A few critical factors explain the rapid development of HFT: the increase in computing power available to investment banks and trading firms, for example, and the deregulation of many stock exchanges in the United States and Europe.

HFT firms employ smart programmers to develop algorithms that can assess market conditions and enable computers to issue thousands of buy and sell orders automatically in less than a second. In this world, speed is everything. Certain exchanges are renting space to trading firms to allow them to locate their computers as close as possible to the exchanges, in order to reduce what is known as “latency”.

In another effort to obtain a speed advantage (of roughly six milliseconds), a dedicated transatlantic cable is being laid to connect London with New York.

Some exchanges are also selling real-time price information to the HFT firms, allowing the latter to obtain prior knowledge of order flow. This enables them to place buy or sell orders ahead of the average individual or institutional investor. (This is analogous to being in a line to buy tickets for the theatre and, as you approach the front of the queue, a tout appears ahead of you to buy the last ticket for, say, £30, then immediately sells it to you for £35.)

These speed and information advantages allow HFT firms to reap millions of dollars of low-risk profits by, in effect, “scalping” pennies off each trade. Because of the huge volume of trades, this adds up to billions of pounds overall.

So what does this mean for you and your retirement funds? Advocates of HFT argue that it provides additional liquidity and so narrows the gap between buying and selling prices.

Yet when market conditions turn adverse, HFT firms can switch off their robo-traders and then liquidity vanishes – as we saw in the “flash crash” of 6 May 2010, when the US market fell by 9 per cent in minutes. Even in normal market conditions, the algorithms used by HFT can increase the volatility of stock prices, which in turn affects the price for those investing your pension money.

What can be done? One simple idea is to limit trading firms’ ability to buy and sell in time increments of less than a second, or to impose a tax or tariff on trades that are held only for such a short time frame.

What is certain is that if nothing is done, pensioners who have saved all their working lives will lose out to the robo-traders that determine most of the current action in the stock markets.

Most financial assets are handled in a very different way to this nowadays. Image: Getty

This article first appeared in the 17 October 2013 issue of the New Statesman, The Austerity Pope

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Is there such a thing as responsible betting?

Punters are encouraged to bet responsibly. What a laugh that is. It’s like encouraging drunks to get drunk responsibly, to crash our cars responsibly, murder each other responsibly.

I try not to watch the commercials between matches, or the studio discussions, or anything really, before or after, except for the match itself. And yet there is one person I never manage to escape properly – Ray Winstone. His cracked face, his mesmerising voice, his endlessly repeated spiel follow me across the room as I escape for the lav, the kitchen, the drinks cupboard.

I’m not sure which betting company he is shouting about, there are just so many of them, offering incredible odds and supposedly free bets. In the past six years, since the laws changed, TV betting adverts have increased by 600 per cent, all offering amazingly simple ways to lose money with just one tap on a smartphone.

The one I hate is the ad for BetVictor. The man who has been fronting it, appearing at windows or on roofs, who I assume is Victor, is just so slimy and horrible.

Betting firms are the ultimate football parasites, second in wealth only to kit manufacturers. They have perfected the capitalist’s art of using OPM (Other People’s Money). They’re not directly involved in football – say, in training or managing – yet they make millions off the back of its popularity. Many of the firms are based offshore in Gibraltar.

Football betting is not new. In the Fifties, my job every week at five o’clock was to sit beside my father’s bed, where he lay paralysed with MS, and write down the football results as they were read out on Sports Report. I had not to breathe, make silly remarks or guess the score. By the inflection in the announcer’s voice you could tell if it was an away win.

Earlier in the week I had filled in his Treble Chance on the Littlewoods pools. The “treble” part was because you had three chances: three points if the game you picked was a score draw, two for a goalless draw and one point for a home or away win. You chose eight games and had to reach 24 points, or as near as possible, then you were in the money.

“Not a damn sausage,” my father would say every week, once I’d marked and handed him back his predictions. He never did win a sausage.

Football pools began in the 1920s, the main ones being Littlewoods and Vernons, both based in Liverpool. They gave employment to thousands of bright young women who checked the results and sang in company choirs in their spare time. Each firm spent millions on advertising. In 1935, Littlewoods flew an aeroplane over London with a banner saying: Littlewoods Above All!

Postwar, they blossomed again, taking in £50m a year. The nation stopped at five on a Saturday to hear the scores, whether they were interested in football or not, hoping to get rich. BBC Sports Report began in 1948 with John Webster reading the results. James Alexander Gordon took over in 1974 – a voice soon familiar throughout the land.

These past few decades, football pools have been left behind, old-fashioned, low-tech, replaced by online betting using smartphones. The betting industry has totally rebooted itself. You can bet while the match is still on, trying to predict who will get the next goal, the next corner, the next throw-in. I made the last one up, but in theory you can bet instantly, on anything, at any time.

The soft sell is interesting. With the old football pools, we knew it was a remote flutter, hoping to make some money. Today the ads imply that betting on football somehow enhances the experience, adds to the enjoyment, involves you in the game itself, hence they show lads all together, drinking and laughing and putting on bets.

At the same time, punters are encouraged to do it responsibly. What a laugh that is. It’s like encouraging drunks to get drunk responsibly, to crash our cars responsibly, murder each other responsibly. Responsibly and respect are now two of the most meaningless words in the football language. People have been gambling, in some form, since the beginning, watching two raindrops drip down inside the cave, lying around in Roman bathhouses playing games. All they’ve done is to change the technology. You have to respect that.

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war