How can you trust the stock market? Read today's article

[Cheesehead]

Could someone please explain how you can trust the market, even if just in index funds, with the problem of high speed trading taking over? Please read today's Chicago Tribune article and tell me how we can trust it:

MarksJarvis: High-frequency trading could lead to another crash - chicagotribune.com

Those who promote the market for growth, and use the past for modeling, as this article states: This is not your parents' or grandparents' market. So, how if there was no high speed trading in the past, how can you model your portfolio and AA going forward?

And as an aside, the last two years I worked the Futures and Options Assoc. Show in Chicago as a vendor. On my breaks I would walk the aisles of the trade show (I like freebies) and was astounded as to how it was all about ALGORITHMS! Huh? I learned that it's all run by Quants who I believe are graduate school math wizards recruited by these high speed trading companies.

So someone who KNOWS, please explain to me why I should be in the market if it is no longer the market we grew up on, and don't quote the past to me.

Thank you

 

[brewer12345]

Oh, please bring on another flash crash. They don't mean anything long term and the last one was a great buying opportunity. I have a chunk of cash lined up and just waiting to go.

 

[NYEXPAT]

Coincidentally, I believe today the German Gov't approved legislation that sought to regulate HFT. Once it is adopted across the Eurozone, I would expect to see similar legislation here.

 

[Texas Proud]

Sorry... subscription to read....


As for why to be in the market Well, companies actually make real money.... real money means value.... if they make more and more money going forward, the value increases.... no matter what else is happening, including computer trading...

 

[Lsbcal]

Sometimes I do worry about HFT. Here is what Gus Sauter (respected manager at Vanguard) said about it recently:

The term high-frequency trading is applied to many different types of participants and strategies in the market. Market makers are high-frequency traders. We need market makers to provide liquidity and for price discovery. High-frequency trading is also used for arbitrage opportunities. We want the derivative markets to be in line with the cash markets. We want futures contracts to be in line with the underlying security. It’s the same with ETFs. Arbitrageurs use high-frequency trading to keep markets in synch with each other. Maybe at the other end of the spectrum there are people abusing the system. The SEC is trying to identify people doing that. It’s a very small percentage of high-frequency trading. Investors have benefitted from changes in the market including HFT. Transaction costs have declined precipitously the past 10 to 15 years. Net-net, we’re better off with HFT than without. Individual investors have benefitted more than institutional money managers. Spreads have narrowed dramatically. The bid and offer are thinner than they used to be; it used to be deeper. But most traders are not trading in enough size to worry about market impact. We benefit from tighter spreads but we still have to be careful.

Full article here:
Vanguard Indexing Guru Gus Sauter on ETFs, High-Frequency Trading - Yahoo! Finance

 

[H2ODude]

I'm not all that fluent on trading. However, I have a lot of money in the market via mutual funds, mostly index. I figure if anyone can game the system to my advantage, it's the big firms like Fidelity. Now, if I was placing orders out there as an individual, for individual equities, yes, I'm certain that "system" would be taking advantage of me.

That's the way I look at it. And as for trusting the market, where ELSE are you going to put your $$$ for the long term gains you need to beat inflation?

 

[explanade]

Where else are you going to put your money?

Unless you got into a 5-year CD years ago, there's no returns on cash. Bonds?

 

[pb4uski]

I think you have your answers, but in my view HFT isn't a huge issue. While the flash crash was disconcerting, and also the fact that they didn't have a clear explanation why it occurred, overall valuations are reasonable given companies earnings and earnings growth so it seems to me that the likelihood of a sustained crash is remote.

 

[marko]

I figure if anyone can game the system to my advantage, it's the big firms like Fidelity. Now, if I was placing orders out there as an individual, for individual equities, yes, I'm certain that "system" would be taking advantage of me.

Right. Ride their coattails!
Between Fidelity, Vanguard, TRPrice, Merrill, etc there are trillions of dollars involved.
Flash Crash made for an interesting afternoon, but most everyone knew what was going on and stayed calm; (I keep CNBC on mute all day long)

 

[unclemick]

1970 - 60/40 stocks/bonds manual. 2006 on - 60/40 stocks/bonds all index full auto lifecycle.

God bless those trusty Vangard computers.



heh heh heh - there are important things in life to be concerned about - like the potential worldwide Bacon shortage(see other thread) and the fact that the Saints have not won a single regular season game.

 

[Tyro]

I don't know, but they're discussing this very topic on CNBC as I type this... (well... after the commercial break...)

 

[Lsbcal]

Interesting article in the NY Times today: http://www.nytimes.com/2012/09/27/b...t-curbs-on-high-speed-trading-advance.html?hp

After years of emulating the flashy United States stock markets, countries around the globe are now using America as a model for what they don’t want to look like.

Industry leaders and regulators in several countries including Canada, Australia and Germany have adopted or proposed a wide range of limits on high-speed trading and other technological developments that have come to define United States markets.
....
Kay Swinburne, one of six members of the committee that drew up the rules, said that there was “a general feeling that the U.S. markets are still learning from their mistakes.” The committee’s draft was approved Wednesday, but it still faces a long process before coming into law. But Ms. Swinburne, a former banker, said she worries that her fellow committee members may go too far and end up choking off trading, making buying and selling stocks more expensive for more traditional investors. In Canada, because of rules that were already in place, the flash crash of 2010 was less severe, taking broad stock indexes down only 4 percent, while they fell over 9 percent in the United States. Canadian regulators recently finished the first stage of an extensive study of the behavior of high-speed trading firms, and earlier this year they instituted the charges-based data traffic, with firms charged for all the orders they cancel, not just the trades they execute. About a quarter of all stock trading in Canada is done by high-speed firms.

 

[Finance Dave]

Where else are you going to put your money?

Unless you got into a 5-year CD years ago, there's no returns on cash. Bonds?

I think this is one good reason.

Another is to look at this in a philosophical way...stock prices are an indication of the value of a company. That "value" is essentially the perceived ability to bring in profits. So long as people believe that companies can make profits, they will invest in equities. The level to which they do this, and the gyrations in the short-term, are certainly questionable...but the only way I think the long-term stock market loses money is if we move away from capitalism....and that will be a sad day IMO.

 

[tryan]

A good friend lost 60k during the last flash crash trading options when his "safe" stop gaps were hit ... only to watch it rebound minutes later. OUCH!

He closed his account the next day.

If you can't hang with the big dogs, stay under the porch!

 

[Onward]

So someone who KNOWS, please explain to me why I should be in the market if it is no longer the market we grew up on

The stock market is never exactly the same thing, even from one day to the next.

At the same time, it's never different.

If you don't get that, there is an army of annuity salesmen out there. Their kids are approaching college age, and they want to talk to you!

 

[Animorph]

In the short term I'm happy to buy lower and sell higher. If HFT helps with that, great.

 

[CyclingInvestor]

Sorry... subscription to read....

Actually, if you just turn off Javascript in your browser it reads fine (turn in back on afterwards - many sites depend on it).

 

[Tyro]

Actually, if you just turn off Javascript in your browser it reads fine (turn in back on afterwards - many sites depend on it).

I had the same problem. I just went to the pull-down menus & found that columnist's article for the day.

 

[marko]

How can you trust the stock market? Time.

Check the charts over time; a picture is worth a thousand words. After a good AA, patience is the only virtue required.

 

[Cheesehead]

Oh, please bring on another flash crash. They don't mean anything long term and the last one was a great buying opportunity. I have a chunk of cash lined up and just waiting to go.

But you must have been taught when you were young not to try to catch a falling knife...

It took until April of 2012 for my portfolio to get back to where it was in October 2008. Now that I am 59 I can't afford such risk.

I have noticed on this forum that some posters have such a high net worth they can survive these drastic drops. I wish this site was divided up based on net worth so we could communicate with other posters who we have a savings parity with, meaning those that can't survive a crash at a certain age. So perhaps you will buy into a bottom but I do not want to experience a bottom again.

Best,

Cheesehead

 

[photoguy]

Could someone please explain how you can trust the market, even if just in index funds, with the problem of high speed trading taking over? Please read today's Chicago Tribune article and tell me how we can trust it:

I don't see this as a problem. Without a standing stop-loss order, I don't see how you would be hurt by a flash crash or other short term volatilities.

Even if trading is dominated by algorithms, I think a lot of this trading is designed to pick up free lunches (arbitrage) or short term momentum effects that don't impact long term fundamentals (prices based on earnings).

 

[brewer12345]

But you must have been taught when you were young not to try to catch a falling knife...

It took until April of 2012 for my portfolio to get back to where it was in October 2008. Now that I am 59 I can't afford such risk.

I have noticed on this forum that some posters have such a high net worth they can survive these drastic drops. I wish this site was divided up based on net worth so we could communicate with other posters who we have a savings parity with, meaning those that can't survive a crash at a certain age. So perhaps you will buy into a bottom but I do not want to experience a bottom again.

Best,

Cheesehead

I've made a career out of catching falling knives.

I would suggest you closely examine your risk tolerance and invest accordingly. Some people sleep well with a volatile portfolio, others prefer a smoother ride. Figure out where you fall on the spectrum, set up an appropritae portfolio, and get on with life.

And in case you are inclined toward conspiracy theories, I can tell you from personal and professional experience that pretty much all of the popular entities and groups supposedly controlling things for their own benefit behind the scenes simply aren't organized, capable, or even intelligent enough to do such things. Half the time its all I can do to avoid getting out the "clue bat" and start swinging.

 

[ERD50]

There are high speed traders on both sides. As another poster said, if it got imbalanced, others would swoop in and it would come back in balance in short order. So I'm not worried one bit about it. Flash crash didn't affect me at all (wish I had some open limit buy orders, that would have been a positive effect).

I've posted several times about the dangers of limit sell orders to 'control/contain' losses. I've never used them, and I never will, and I'm a fan of the saying 'never say never'.

-ERD50

 

[Animorph]

But you must have been taught when you were young not to try to catch a falling knife...

It took until April of 2012 for my portfolio to get back to where it was in October 2008. Now that I am 59 I can't afford such risk.

I have noticed on this forum that some posters have such a high net worth they can survive these drastic drops. I wish this site was divided up based on net worth so we could communicate with other posters who we have a savings parity with, meaning those that can't survive a crash at a certain age. So perhaps you will buy into a bottom but I do not want to experience a bottom again.

Best,

Cheesehead

Four years of cash at the start and you were through without a scratch. I reinvested my cash in increments all the way down. All of those investments are now well in the money. I'm better off now then if the market just made a straight line between 10/2007 and now.

Edited to add: Falling knives are more relevant if you are buying stocks that could go to zero. I was 99.9% sure that my favorite ETF at the time, VNQ, would eventually exceed what I paid for it. I was out of most individual stocks before 2007.

 

[ziggy29]

You can't. The problem is that you can't trust bonds with pitiful yields and rates that don't seem to have much chance of going down much more, and you can't trust cash earning basically zero when inflation is making it worth less all the time.

There seems to be no good place to put your capital today. Pick your poison.