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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What Donald Trump could learn from Ronald Reagan

Reagan’s candidacy was built on more than his celebrity. Trump not only lacks experience as an elected official, he isn’t part of any organised political movement.

“No one remembers who came in second.” That wisdom, frequently dispensed by the US presidential candidate Donald Trump, came back to haunt him this week. Trump’s loss in the Iowa Republican caucuses to the Texas senator Ted Cruz, barely beating Senator Marco Rubio of Florida for second place, was the first crack in a campaign that has defied all expectations.

It has been a campaign built on Trump’s celebrity. Over the past eight months, his broad name recognition, larger-than-life personality and media savvy have produced a theatrical candidacy that has transfixed even those he repels. The question now is whether that celebrity will be enough – whether a man so obsessed with being “Number One” can bounce back from defeat.

Iowa isn’t everything, after all. It didn’t back the eventual Republican nominee in 2008 or 2012. Nor, for that matter, in 1980, when another “celebrity” candidate was in the mix. That was the year Iowa picked George H W Bush over Ronald Reagan – the former actor whom seasoned journalists dismissed as much for his right-wing views as for his “B-movie” repertoire. But Reagan regrouped, romped to victory in the New Hampshire primary and rode a wave of popular support all the way to the White House.

Trump might hope to replicate that success and has made a point of pushing the Reagan analogy more generally. Yet it is a comparison that exposes Trump’s weaknesses and his strengths.

Both men were once Democrats who came later in life to the Republican Party, projecting toughness, certainty and unabashed patriotism. Trump has even adopted Reagan’s 1980 campaign promise to “make America great again”. Like Reagan, he has shown he can appeal to evangelicals despite question marks over his religious conviction and divorces. In his ability to deflect criticism, too, Trump has shown himself as adept as Reagan – if by defiance rather than by charm – and redefined what it means to be “Teflon” in the age of Twitter.

That defiance, however, points to a huge difference in tone between Reagan’s candidacy and Trump’s. Reagan’s vision was a positive, optimistic one, even as he castigated “big government” and the perceived decline of US power. Reagan’s America was meant to be “a city upon a hill” offering a shining example of liberty to the world – in rhetoric at least. Trump’s vision is of an America closed off from the world. His rhetoric invokes fear as often as it does freedom.

On a personal level, Reagan avoided the vituperative attacks that have been the hallmark of Trump’s campaign, even as he took on the then“establishment” of the Republican Party – a moderate, urban, east coast elite. In his first run for the nomination, in 1976, Reagan even challenged an incumbent Republican president, Gerald Ford, and came close to defeating him. But he mounted the challenge on policy grounds, advocating the so-called “Eleventh Commandment”: “Thou shalt not speak ill of any fellow Republican.” Trump, as the TV debates between the Republican presidential candidates made clear, does not subscribe to the same precept.

More importantly, Reagan in 1976 and 1980 was the leader of a resurgent conservative movement, with deep wells of political experience. He had been president of the Screen Actors Guild in the late 1940s, waging a campaign to root out communist infiltrators. He had gone on to work for General Electric in the 1950s as a TV pitchman and after-dinner speaker, honing a business message that resonated beyond the “rubber chicken circuit”.

In 1964 he grabbed headlines with a televised speech on behalf of the Republican presidential candidate, Barry Goldwater – a bright spot in Goldwater’s otherwise ignominious campaign. Two years later he was elected governor of California – serving for eight years as chief executive of the nation’s most populous state. He built a conservative record on welfare reform, law and order, and business regulation that he pushed on to the federal agenda when he ran for president.

All this is to say that Reagan’s candidacy was built on more than his celebrity. By contrast, Trump not only lacks experience as an elected official, he isn’t part of any organised political movement – which enhanced his “outsider” status, perhaps, but not his ground game. So far, he has run on opportunism, tapping in to popular frustration, channelled through a media megaphone.

In Iowa, this wasn’t enough. To win the nomination he will have to do much more to build his organisation. He will be hoping that in the primaries to come, voters do remember who came in second. 

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