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Are robots controlling stock prices?
Old 08-05-2011, 03:59 PM   #1
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Are robots controlling stock prices?

I have a handful of stocks in my portfolio. They usually go up and down individually according to the financial news for the company, analyst ratings, etc.

I see that today all of them moved in lockstep. The charts are very similar for each stock as though market forces have swamped the individual story of each stock. This is the first time I have seen this in my portfolio. So much for diversity! I suppose, in the long run, each stock will sink or swim based on performance. But still, this is disturbing.

-flotsamandjetsam

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Old 08-05-2011, 09:25 PM   #2
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I doubt it. If everyone used Microsoft "Stock Trader" then everyone would do the same thing. In the real world, whenever someone sells a stock, someone else buys one.
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Old 08-05-2011, 11:45 PM   #3
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I also own several stocks, all of which appeared to have traded at 3-6 times normal daily volume on Friday. Noticed that your chart showed the same very high volumes as well.

There could be a large hedge fund or institutional holder who decided to liquidate; every sector of the market - energy, tech, healthcare, industrial - went down in heavy volume. And the declines occurred at about the same time of the day. Kind of coincidental, don't you think?
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Old 08-06-2011, 12:06 AM   #4
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Are robots controlling stock prices?
Well, that sounds a lot more logical than random prices driven by irrational traders under emotional stress.
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Old 08-06-2011, 04:50 AM   #5
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Kinda... but they don't call them robots. Speed trading controlled by super computers that are on a special network that is tapped into the electronic exchange (so they get the information before anyone else). They use special trading algorithms to try to siphon off thousands of small gains each day in quick buy an sell.

It appears to work (for them)

They also manipulate the market by placing huge numbers of orders and then withdrawing them.

Many seem to believe the speed traders were the cause of the flash crash (the huge spiral down). Although it apparently a mistaken trade seems to have initiated the massive trading.

Personally, I think it is market manipulation and an unfair advantage that is (now) being sold by the exchanges to people who have large amounts of capital. It has not been outlawed yet or had special regulatory controls put on it.

I think we will eventually look back on it and know we all were taken. It will be kinda like those mutual funds a few years ago that were letting hedge funds take on the mutual fund after hours...

Governments are watching it closely. I believe the speed traders will push the envelop to a point (more complex manipulation) that it will cause a real crisis. Then it will be banned or curtailed. IMO - the way to deal with it is to charge a fee for withdrawing trades... doesn't have to be too high. It would be inconsequential to most of us (including most large institutions)... but for a computer that jams in millions over a year... it would offset gain by manipulation... then they would be reduce to only getting gains by a real arb.


Why has that not happened already? Because the exchanges are offering it as a service and have turned it into a profit center!!! Yup... we are getting scr3wed!

How Speed Traders Are Changing Wall Street - CBS News


IMO - one more of a reason to own low cost index funds or etfs.
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Old 08-06-2011, 05:45 AM   #6
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Thank you for your post, chinaco. Very interesting reading for a non financial person like me.
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How Speed Traders Are Changing Wall Street - CBS News


IMO - one more of a reason to own low cost index funds or etfs.
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Old 08-07-2011, 12:32 PM   #7
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Quote:
Originally Posted by flotsamandjetsam View Post
I see that today all of them moved in lockstep. The charts are very similar for each stock as though market forces have swamped the individual story of each stock. This is the first time I have seen this in my portfolio. So much for diversity! I suppose, in the long run, each stock will sink or swim based on performance. But still, this is disturbing.
In terms of generalities, in CAPM the simple premise is called 'systematic risk', or the beta portion of your portfolio risk. For indexers, I suppose that it would be called 'market risk'. In current trader lingo, it is called the 'risk "ON" trade'.

Basically, the general concept is that in this post-financial collapse, recessionary and debt-laden world the various Central Banks (CB) are extremely wary of things like deflationary spirals, stagflation, liquidity traps, etc. so they have done everything in their power to force people and investors to spend and invest their cash versus the alternative of earning de minimis interest on cash - or even losing relative value on cash through monetary inflation which can be hedged instead by buying Gold. The binary situation that the CBs have forced on investors is thus to play their game and to hold a Risk asset or to hold Gold if they are betting against the CBs: There are no cash equivalent investments in this world that will pay decent interest for wary investors to tread water in as those investments are Risk assets as well.

The interesting thing about the capitulation on Thur was that the sell-off took both Risk assets and Gold down with it which is frightening for the CBs in that the risk "OFF" trade is what they do not want. Deleveraging is not good in their opinion so the huge deleveraging sell-off that we experienced last week is surely scaring them. The bookies were the big winners as they told all the players in the gambling hall to put up their margin - therefore, the total value in the room went down which means all tables have less money on them (or, in other words, all Risk assets have lower value).

Once things settle in the short term I suspect the Gold guys are loving this market since the UST credit cut on Fri will force more market chaos which will then force some who were long Risk assets to eventually bid up Gold rather than to hold cash. Those who are not forced margin sellers of long positions will all place collar trades on their positions and buy Gold to hedge ASAP.

Some friends had a meeting with S&P a few days ago and asked them whether the Obama administration was applying pressure on them to not cut the UST rating: S&P replied, "We are not officially able to respond to that question"! Sell Mortimer, Sell!!!

Laissez les bon temps roullez!
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