I was concerned enough about relying on computers to make decisions for us in trading. But my concern was lessened knowing that computers will follow the rules they're given. My problem is, I don't think deviously enough.
One of the ways traders misled investors in the past was by conducting sham trades with themselves. A trader might enter orders to buy and sell shares of a stock between two entities it controls, giving the false impression there's strong investor interest for the stock at certain prices. This is called painting the tape.
The computerized trickery is enabled by physics. Since trades move over computer networks at roughly the speed of light, the firms that are physically located nearest the market centers in New York and pay market-access fees get a leg up.
The reason? Each 186 miles a trader is physically located away from the New York trading center, about a millisecond is added to the time to execute a trade, Hunsader says, because that's the speed of light; data can't travel over fiber-optic networks faster than the speed of light.
A millisecond might not sound like much, but it's an eternity for traders who can put up bids or offers for stocks and yank them before other investors located away from New York or with slower connections to the markets can respond. "Trading has gotten to the point where the speed of light is now the major source of latency," Hunsader says.
Thanks to low-cost and automated trading, trading firms can swamp markets with a deluge of buy and sell orders in a way that gives them an advantage, Hunsader says.
If you are willing to scare yourself to death, read the whole article. And then remember that everything we use is traded on the market. Like say, oil and gas.
HT Paul Wyndale