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 defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.