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Will the Internet Destroy the Stock Market? - Jeff Stibel - Harvard Business Review


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This type of short-term trading is tantamount to legalized gambling. While it has been around since the beginning of the stock market system, in the 21st century, it has been taken over by internet technologies and accelerated beyond recognition. High frequency traders use complex algorithms to exploit micro differences in trading prices over time — not years, months, or days... but seconds and milliseconds. Admittedly, fund managers cannot even explain the algorithms because the networks learn as they go and change algorithms accordingly. The computers far exceed human ability to compute, calculate, and predict, and they pick up on and exploit tiny factors that no human brain can recognize. I would go as far as saying that there is actually an artificial intelligence at work here, which none of us fully understand.

Increasingly, winners at this new stock market game are determined not just by the fanciest algorithms but also by the speed of the hardware that provides access to the information needed to plug into the algorithms. The process is already fast — news of an event goes from the wire to a trader's computer network in milliseconds. But the difference between recognizing and reacting to that data nanoseconds faster can mean billions lost or gained. These tiny fractions of a second (much, much faster than a blink of an eye) are so important that some traders have gone to great lengths to improve their speeds. Many have purchased dedicated internet cabling, some have gone so far as to move their computer networks to be in close physical proximity to the data centers of the stock exchange and news outlets, paying hundreds of millions of dollars for direct access.

Untold fortunes have been made as a result. But problems have surfaced. In June, Thomson Reuters came under fire for allowing its elite clients to see consumer confidence data 5 minutes and 2 seconds before the general public gained access. On one day — May 17, 2013 — over $100 million changed hands before the rest of the public even knew an event had occurred. This event didn't lead to a crash, but it could have. That is what happened a few years prior when high frequency trading contributed to the May 6, 2010 "Flash Crash" in which the Dow dropped 1000 points in minutes, only to recover a few minutes later. Computer networks are working faster and more efficiently than the markets can bear. Is this a foreshadowing of what is to come?

He makes a compelling case. If I had any money right now I'd be afraid to put it in the stock market.

I would buy valuable things and invest in startups instead.

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